Stryker Corporation (SYK) Q1 2015 Earnings Report, Transcript and Summary

Welcome to Stryker’s First Quarter 2015 Earnings Conference Call. My name is Lakiba and I will 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. [Operator Instructions] This conference call is being recorded for replay purposes. Before we begin, I would like to remind you that the discussions during the conference call will include forward-looking statements. Factors that could cause actual results to differ materially are discussed in the company’s most recent filings with the SEC. Also the discussions will include certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures can be found in today’s press release that is an exhibit to Stryker’s current report on Form 8-K filed today with the SEC. I will now turn the call over to Mr. Kevin Lobo, Chairman and Chief Executive Officer. You may proceed, sir.

Good afternoon, everyone and welcome to Stryker’s first quarter 2015 earnings call. Joining me today are Bill Jellison, our CFO and Katherine Owen, Vice President of Strategy and Investor Relations. Following my opening comments, Katherine will provide several updates, including MAKO. Bill will then offer details on our quarterly results before turning to questions and answers. Our first quarter results continue to reflect the strength of our sales and marketing teams, our diversified businesses and the payoff we are realizing from our investments in innovation. We had another strong quarter of organic sales growth of nearly 6% and EPS topped a high-end of our projected range for the quarter. Trauma and Extremities, Sports Medicine, Interventional Spine and our Neurotechnology franchises all continued their momentum from last year with excellent growth. Our medical business also had an outstanding quarter, marking three successive quarters of stellar performance. And our U.S. Hip business helped to fuel the strength in Orthopedics. We are pleased with the continued progress on MAKO, which was a highlight of the recent American Academy of Orthopedic Surgeons Meeting. And we continue to have a high level of conviction regarding the long-term potential for robotics in orthopedics. We are encouraged with launch of our transatlantic operating model, as Europe posted another good quarter of growth and with strength in divisional leadership is set up for accelerated gains in the years ahead. As a reminder, we have used some of the benefits of our lower tax rate to invest in Europe SG&A. Growth within the emerging markets was solid again, as was our performance in Australia. Like any quarter, we had some challenges, including U.S. supply disruptions, which adversely impacted revenue for both Instruments and MAKO implants. The MAKO issues will be resolved in Q2, while the Instruments situation will linger into Q3. Despite these challenges, both businesses managed to post positive growth in the quarter. In both cases, we see delayed sales and no material loss of revenue for the full year. Japan is on an improving trajectory and we expect this trend to continue as we move through the year. Growth from our recent acquisitions was also modestly below our expectation in the first quarter, but our teams are excited about the future of these businesses as they work through early integration. Foreign exchange was a negative impact, in line with our Q1 expectations. And if rates remain at current levels, we will generally be in line with the full year guidance communicated in January. We have also repurchased $280 million of our stock year-to-date, $130 million of which occurred during Q1. In sum, we are off to a strong start for 2015, with top line strength across our three business segments and balanced globally. We are driving earnings results with disciplined expense management, while continuing to invest in R&D to ensure long-term revenue growth. Our solid balance sheet and cash flow generation remains a key characteristic of Stryker and positions us well as we continue to look for the best ways to invest in our future. As an organization, we are focused on consistently delivering on our targets as we strive to optimize shareholder returns. With that, I will now turn the call over to Katherine.

Thanks Kevin. The focus of my comments today will be on providing an update on MAKO, progress with our Transatlantic Operating Model or TOM as well as some comments on the recent clinical studies regarding acute ischemic stroke. With respect to MAKO, we are pleased with the continued progress we are seeing following the integration of this business during 2014. In the first quarter, we placed nine robots versus two in the year ago quarter, with the placements representing a nice balance between existing Stryker customers and competitive accounts. We did have some challenges with our MAKO knee implants going to a temporary product supply disruption during the quarter, the impact of which will be fully resolved during Q2. Adjusting for this, our U.S. Knee growth would have been modestly higher. Looking ahead, we are encouraged by the strength of the pipeline, which reinforces our conviction in the growing interest in robotics. And with sales force integration complete and new robotic indications now cleared, we are well positioned for 2015 and beyond. With respect to the latter, our Stryker Power Hip brand, including Accolade are now compatible with the MAKO hip application. Additionally, our X3 polyethylene bearings have also been cleared for use with the MAKO Uni implants. Our Total Knee 510(k) application was submitted to the FDA late last year and we are continuing the dialogue with the agency. Turning to TOM which went live at the beginning of the year, this initiative will enable us to drive a multi-year improvement in our growth profile in Western Europe. The structure is fully operational, with eight transatlantic division Presidents now having full P&L responsibility for the combined U.S. and Europe businesses. They each have a General Manager, all based at our regional headquarters in Amsterdam with direct responsibility for sales and marketing in Western Europe. The RHQ represents a flagship for our presence in Europe as we bring in HCPs into the site for training and education on our Stryker products. We believe this will be key to strengthening the Stryker brand in Europe and enhancing our relationship with physicians and hospitals. As we discussed approximately half our lower tax savings is being reinvested into our European business in terms of additional sales and marketing headcount and support to help further accelerate growth. Lastly, over the past four months, an impressive amount of strong clinical data had been released supporting the use of device-based treatment of acute ischemic stroke. From the acquisition of Concentric, we have pioneered this space in our unique and differentiated products. Trevo represented the majority of the products used in the pivotal MR CLEAN study, which was published in the New England Journal of Medicine in January. We expect the market will take time to evolve, which will require the automation of EMS transport and inter-hospital transfers, establishment of clinical guidelines, position incentives and investment in new human and physical capital to absorb new patient volume. Clearly as the data comes out, it reinforces our excitement from the ischemic stroke market and its longer term revenue potential. We believe we are well positioned and we will continue to invest in this therapy through further product development, the funding of next generation trials and supporting the full continuum of care for stroke. With that, I will now turn the call over to Bill.

Thanks, Katherine. Sales growth was 3.2% in the first quarter including a negative 4.2% impact from FX translation. Constant currency sales growth was 7.4%, which includes organic growth of 5.6%. EPS on a GAAP basis for the first quarter were $0.58 per share versus $0.18 per share last year in the first quarter, while adjusted earnings per share were $1.11 per share for the quarter versus $1.06 per share in the first quarter of last year. This quarter’s EPS includes negative impacts of roughly $0.08 per share from FX. Foreign exchange rates were very volatile again during the first quarter with the Japanese yen, Australian dollar, euro, Swiss franc and many other currencies weakening against the dollar. The weakening of the Swiss franc and our layered hedging program helped to mitigate the additional weakening of other currencies that occurred within the quarter. The most significant non-GAAP adjustments in the quarter relates to charge – a charge of approximately $54 million associated with the voluntary recalls of Rejuvenate and ABG II and an additional tax expense associated with the transfer of intellectual property to the Netherlands from some of our other European locations. The charges for the Rejuvenate matter may increase or decrease over time as additional facts become available and assumptions become more refined. Looking at sales in the first quarter, our organic growth of 5.6% was comprised of a positive 7.1% from volume and mix, while price negatively impacted sales by 1.6%. Acquisitions added 1.9%, while FX had a negative 4.2% impact on the sales in the quarter. Looking at our segments, Orthopedics represented 43% of our sales in the quarter. Sales of Orthopedic Products were up 2.4% as reported and grew 7.5% at constant currency and increased 6.5% organically. U.S. Orthopedic sales grew 9.7% in the quarter. Trauma and Extremities once again had another standout quarter, with sales in the U.S. increasing 18% and 11% in international markets in constant currency, with over 30% growth in our U.S. foot and ankle business or roughly 20%, excluding the impact from the acquisition of SBI, as we continue to have great success with our product offerings in this expanding market. U.S. Hips continued its strong performance and grew 7.5% in the first quarter, while U.S. Knees increased 2.4%. Internationally, sales were down 1.3% in Hips in constant currency and increased 4.5% in Knees in constant currency. Next, our MedSurg segment represented approximately 39% of our sales in the quarter. Total MedSurg sales increased 4.6% as reported, with 7.7% in constant currency and increased 4.3% organically. These results were led by double-digit organic and constant currency growth in our medical business as our sales force, combined with a strong product offering, continue to execute in an improving capital equipment market. We also experienced mid to upper single-digit constant currency growth in Instruments, Endoscopy and Sustainability. Our Instruments business was negatively impacted in the first quarter and will also be negatively impacted in the second quarter by product supply issue at one of our suppliers. We believe Instruments organic growth for the quarter would have run at least in the upper single-digits if supply was fully available. This issue was expected to be resolved by early in the third quarter and should have modest impact on Instruments full year results. Our final segment, Neurotechnology and Spine, which represents 18% of our sales in the quarter, increased 2.1% as reported and 6.6% in constant currency and 6% organically. Growth in this segment was led by double-digit growth in our Neurotechnology businesses and IBS, while spinal implant sales increased slightly in the quarter. And looking at our operational performance, gross margins on an adjusted basis in the first quarter of 2015 were 65.6%, relatively flat with the back half of 2014 and compares to 66.6% in the first quarter last year. Gross profit includes a re-class of expenses in all periods of approximately 30 basis points, which came out of SG&A for consistency. The decline in the margin rate in the quarter compared to the first quarter of last year predominantly resulted from negative pricing pressures and negative mix related to our recent acquisitions. Pricing was down 1.6% in the quarter, better than last quarter and last year, which both ran approximately 2%. Pricing pressure remains challenging and we still expect pricing to be down nearly 2% for the company moving forward. Research and development expenses were 6.4% of sales, relatively flat compared to last year in the quarter. Selling, general and administrative costs on an adjusted basis were $854 million or 35.9% of sales in the quarter versus 36% in the prior year period, despite reinvestments to strengthen our European selling and regional headquarter activities. Operating margins on an adjusted basis were 23.3% in the first quarter of 2015 compared to 24.1% in the first quarter of 2014. The rate was negatively impacted by pricing, FX and the mix of recent acquisitions, along with activities to support our European business. These impacts were partially offset by operating improvements in the period. Other expense in the first quarter was approximately $28 million compared to $24 million last year in the first quarter. This increase in expense resulted primarily from higher net interest expense in the period. Our reported tax rate for the first quarter was 40.6%, while our adjusted effective tax rate was 19.5%. This compares to a 24.1% adjusted effective tax rate in the first quarter of last year. Looking at the balance sheet, we ended up the quarter with $4.3 billion of cash and marketable securities. We also have $3.5 billion of debt on the balance sheet at the end of the quarter. From an asset management standpoint, accounts receivable days ended in the first quarter at 58, slightly above last year’s first quarter. And days and inventory finished the quarter at 173, just a little bit better than the 174 days in the first quarter of last year. Turning to cash flow, our cash from operations in the first quarter of 2015 were $380 million compared to $209 million last year in the first quarter. Capital expenditures were $46 million in the first quarter of 2015 compared to $70 million in 2014. However, capital expenditures are expected to run higher than last year as we move through 2015. We also repatriated approximately $700 million in the first quarter and expect to do approximately an additional $1 billion later this year. We now have over $2.3 billion available for share repurchase under our recently expanded authorization as approximately $280 million of share repurchases were made so far in 2015, with $130 million of that repurchased by the end of the first quarter. We will continue to evaluate the level and frequency of our share repurchases. However, current plans are to fully utilize the current authorization over the next 2 to 3 years. Based on our solid first quarter results and current expectations for the remainder of the year, we are well positioned to deliver on our full year sales and earnings guidance. And we are now increasing the lower end of our guidance for both sales and earnings for 2015. Our sales guidance now includes constant currency growth of 6% to 7%, with organic sales growth in the range of 5% to 6%. If foreign exchange rates hold near current levels, we expect net sales for the full year of 2015 to be negatively impacted by approximately 3.5% to 4.5%, with the second quarter sales projected to be impacted the most and slightly over that range. Pricing pressure will continue and prices are currently expected to be nearly 2% for the company moving forward, consistent with the pricing environment we experienced over the last year. The benefit from the renewal of the tax extenders continues to be in our year end earnings guidance and represents approximately $0.05 per share for the year. We continue to expect that they will once again be approved. However, we do not expect them renewed until late in the year. As such, we do not have any benefit from them in our actual results or our planned earnings guidance until the fourth quarter of this year. We also expect that our adjusted tax rate will run at or below the level achieved in the first quarter and will be noticeably better when the benefits from the tax extenders are approved. As mentioned previously, we plan on reinvesting approximately half of our tax savings associated with the European regional tax – regional headquarters. These additional investments are supporting our new structure within Europe and will also supplement our selling and marketing activities. Based on current FX rates, we expect 2015 to be negatively impacted by approximately $0.25 to $0.30 per share for the full year, with approximately half of that occurring in the first half of the year. The further weakening of the euro and most other currencies since our original guidance, along with our hedging program has not resulted in an additional FX impact on us as the Swiss franc has also significantly weakened in that period. That weakening along with the euro makes all of our European produced products less expensive and combined with our layered hedges has fully offset the additional translational impact which occurred. Keep in mind that the full year negative impact of foreign exchange rates movements is largely driven by the translational component of FX, which we do not hedge. And finally, we have heightened the lower end of our earnings guidance for 2015, with adjusted net earnings per share now in the range of $4.95 to $5.10, with adjusted net earnings per share in the range of $1.15 to $1.20 for the second quarter of 2015. Thanks again for your support and we would be glad to answer any questions that you may have at this time.

Thank you. We would now begin the question-and-answer session. [Operator Instructions] And your first question is going to come from Rick Wise out of Stifel. Please go ahead.

Good afternoon. Can you hear me clearly?

Yes.

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

Yes. Hi, Rick. It really is the recent deals because – as they pass the 1-year mark, they have become part of organic growth. And nothing that we would call out beyond some of the early normal integration challenges. It’s primarily around the Berchtold acquisition, which we anniversary in the second quarter and within our endoscopy segment. We feel really good about the pipeline and the visibility we have for that revenue to improve as the year unfolds, but it really is just the normal integration, early challenges we have when we bring a new business in.

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

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

Thank you. Our next question is going to come from Bob Hopkins with Bank of America. Please go ahead.

Hi Bob.

Hello Bob.

Bob, if your line is on mute, please un-mute it. Okay. Our next question is going to come from Kristen Stewart from Deutsche Bank. Please go ahead.

Hi, I guess you guys can hear me, right.

Yes we can.

Thanks Kristen.

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

Sure. So the re-class is really just for consistency. It’s really one of our groups were classifying some of the expenses the same way. So it’s a re-class of some of the freight costs that are coming out of the SG&A category and going into COGS and it’s about 30 basis points, pretty much on average for this year. But all of the restatements will be reflected in the financials in both periods. As far as the tax rate, yes we stated early on in the year that we were expecting at least two full percentage points of improvement off of last year’s rate. I think that we feel very good about kind of one, where the rate came out for the quarter and are pleased with realizing kind of the benefit associated with that. And as we mentioned, we do believe that that rate is sustainable throughout this year. And then also keep in mind, in the fourth quarter when the tax extenders, if they do get approved at $0.05 a share that will affect it by about another full percentage point.

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

Yes. In total greater than 200 basis points, yes that’s correct.

Okay, perfect. That’s it for me. Thanks.

Thanks, Kristen.

Thank you. Our next question is going to come from Mike Weinstein from JPMorgan. Please go ahead.

Thank you. So first question I guess it’s all really guidance questions. First question is the underlying growth actually came in probably a tad below industry where the street for that, obviously very good quarter, so it’s very Stryker-like in terms of the breadth, but you are raising the kind of organic and constant currency guidance for the year, so maybe just touch on what’s driving the increase, given what was a good quarter but not one of your blowout quarters?

Well, Mike, this is Kevin. I would tell you, we feel very good about the quarter and certainly the outlook for the rest of the year. All of our businesses are performing well by segment, by geography and we even had a challenge within instruments, which is one of our largest divisions that had a supply issue that will get rectified. Obviously, MAKO implants was the more modest, but even that had supplies. So, we fought through some supply challenges, still delivered almost 6% organic growth and feel very good about the position that we are in right now. The expenses are well under control. You heard about bill on the tax rate. So we really have all of our engines firing. And we are feeling very positive as we look through the rest of the year and that’s why we felt confident in raising the lower end of both sales and earnings.

Okay. And then on the earnings piece, making sure I have got all the moving parts. So it sounds like the answer to Kristen’s questions on the tax rate is that the tax rate for the year instead of being 20% may end up being closer to 19%, I just want to double check on that. And then the FX thing obviously surprised us because the dollar has gotten over the course of the last 3 months since your last call, on the fourth quarter you guided to $0.30 of impact for the year and now you are saying $0.25 to $0.30, so that’s just the function of basically the Swiss manufacturing and the interchange between the euro, the dollar getting stronger versus euro, but the Swiss franc weakening at the same time?

Yes. So, both of those questions, on the tax side of the equation, yes we do expect the rate to be lower than the 20% that we talked about. So at least, two if not obviously closer to three which is more in line with kind of where that first quarter is and especially if you add extenders in there, we should absolutely be able to deliver on that – on the tax aspect piece for the entire year. As far as FX is concerned, you are absolutely right. FX rate definitely weakened further against the U.S. dollar for most currencies. And fortunately, the Swiss also weakened along with it. And if you recall, the Swiss franc actually strengthened when it decoupled away from the euro at the beginning of this year, which actually caused our FX exposure to increase just prior to our guidance for the – at the beginning of the year. So based on that weakening of the Swiss along with the euro and the hedges that we currently have in place, we believe that we are fully offsetting at least the additional impact of the translational side that’s occurred since our original guidance.

Perfect. I will let some others jump in. Thank you, guys.

Thanks Mike.

Thank you. Our next question is going to come from David Roman from Goldman Sachs. Please go ahead.

Thank you and good afternoon everybody. I wanted to just start on capital deployment, obviously you made the comments around the share repurchase activity that took place both year-to-date and in the first quarter, could you maybe just talk – and then I think, Bill you also provided some context as to the timing of when you expected to use the authorization, could you maybe just talk about what were the factors influencing your decision to buyback stock, I think it’s in several quarters since you bought back this type of – this type of stock and whether we should think about this as a change in the capital deployment priority scheme or just how it fits into the broader strategy?

Yes. I would – David I would view it as very much consistent with the capital allocation strategy we have tried to articulate. We still view M&A as the primary use with the dedicated BD folks in all of our divisions who are actively looking at targets. We also have with the cash flow, the ability to do buybacks as well as the dividend. And so there is no change. We did increase the authorization. It gives us the flexibility. And we expect to use it over the next 2 to 3 years. I couldn’t predict in any given quarter we will be at these same levels. We usually have an assumption of around $400 million of share repurchases in any given year. This year could be higher than that. It just will depend on how the year plays out, other potential uses of cash and also recognizing the constraints that we along with many others have given where the bulk of our cash is generated being outside the U.S. So, no change whatsoever to the capital allocation strategy. And we are in the – we have the ability to continue to pursue multiple avenues.

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

No, I think that, that’s at least a fair comment. I think as we – as you look toward kind of the back end of this year, the remaining part of the year, I think you should expect that our gross margin rate differences on a year-over-year basis should be much narrower than what you have seen over the last year.

Thank you. Our next question is going to come from David Lewis from Morgan Stanley. Please go ahead.

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

Yes, thanks, David. I would say the first thing I would point to is MAKO. As you can see the kind of momentum we have already started to build with 20 robots in Q4, 9 this quarter, a number of our implants getting approved on the robot increased level of interest. And so I would see MAKO as one growth accelerator. Second, I would see the acute ischemic stroke as another area that with all the great data that’s coming out would be another engine. Now, that might take a little bit more than ‘16, but it should certainly start to ramp in ‘16. Our transatlantic operating model, we are very pleased about the upside that, that has. Not so much in the implant side, but certainly, if you look at MedSurg and even parts of Neurotechnology, we have a lot of room to grow our market share and we are very pleased with the start. It’s early – only one quarter since it’s gone live, but had a very strong quarter and I would see that also accelerating in 2016. So, a number of those levers and then the acquisitions that we have done, we have done a number of, I guess, 6 over the past – just over a year of bolt-ons. And those bolt-on acquisitions, whether it’s CoAlign, Pivot, Berchtold, all of those go through sort of early integration issues. And then those will start to accelerate. So, I really am excited about the prospects. 2015 will be a solid year. And I think 2016 could set up to be an even better one.

Great. And just a quick follow-up on capital deployment, Kevin, there has been a dramatic amount of focus on what you are going to acquire in these last 6 months. Shifting away from what you are going to acquire to the class of thing that you are looking at. There seems to be at least in our view a lot of focus from investors on purchasing for accretion and it takes you some pressure if there is any multiple and really driving accretion. Do you feel that type of pressure? Does the board feel that type of pressure? And where does Stryker come out right now in terms of your preference versus acquisitions for growth versus acquisitions that could be growth or growth and accretion? Thank you.

So, maybe I will take the first part and then ask Bill to chime in, since Bill obviously, the finance group has a big say in terms of making sure we are creating value over the long-term, but we really look to strengthen our businesses and we are looking to do acquisitions. We want to strengthen our market position in the areas where we are playing today and that could be big deals, small deals or medium sized deals, but we want to make sure we are strengthening our position and encouraging our divisions to continue to drive growth. So, most of the acquisitions that we pursue and you have seen this are catalysts for growth and we tend to plug those into existing divisions and then drive accelerated growth. But we are disciplined in terms of the deals that we look at and the price that we paid for deals. Clearly, in the case of a MAKO, that was a disruptive deal, which is a little bit out of the ordinary. But all the other deals go through very rigorous screening to make sure that we are paying the right price and that will create value. Maybe I will turn to Bill in terms of the parameters that we look at when evaluating our acquisitions.

Sure. So, I would say that we are all very aware of also the need for accretion in the earnings as we do acquisitions. But as we have talked about before, whether we have done maybe some non-accretive deals in the past or not, I think each deal that we look at is really looked at from the standpoint that we think that it ultimately creates value for the company over the mid and long-term as well. And would we be looking or would be willing to still look at an acquisition that necessarily doesn’t or that doesn’t necessarily have accretion in the first year or so? We would. It’s all about whether it ultimately adds value on the back end in an earlier stage business, which we think has much higher growth for the organization than even our base level, we would absolutely make that investment – another investment like that today. But all of our acquisitions are based on the value that we think we can ultimately create for the shareholders, but we aren’t restricted on just accretion as one aspect of it.

Thank you. Our next question is going to come from Matt Taylor from Barclays. Please go ahead.

Hi, thanks for taking the questions. I just wanted to ask one, I guess, on your repurchase change here. So, you did talk about kind of a normal level of $400 million on this call and past calls. And if you just do the 2 to 3 years for the $2.3 billion, obviously, that’s a higher number. So, are you saying that you are just leaning more towards your purchase here, because you don’t have the same kind of M&A pipeline or things aren’t hitting your targets or you are not trying to change your staff at all, I guess I am just a little confused and want to clarify?

Yes, no change in the staff in terms of BD being a priority and then folks as I mentioned out there are actively looking at targets. We have upped the authorization, because we feel we have the flexibility if we decide M&A is inherently unpredictable. So, we wanted to have the flexibility to potentially purchase a greater level. $400 million isn’t exact number it’s a rough number walking around. It could be higher than that this year and obviously to use up the entire amount over 2 to 3 years, we have to increase the level. So, if it’s done in 2 years, we have obviously accelerated the share repurchases and some of that will depend on whether or not BD targets make it through to fruition. As you know, the vast majority of names we look at never translate into an actual deal.

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

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

Thank you. Our next question is going to come from Bob Hopkins from Bank of America. Please go ahead.

Hey, Bob.

Bob, are you there?

Mr. Hopkins, your line is open.

Okay. Maybe the third time will be the charm with Bob.

Okay. Okay, I will have him re-queue back up. Our next question is going to come from Mike Matson from Needham & Company.

Hi, thanks for taking my questions. I guess I had one on MAKO and then one on the Neurotechnology business. So, just on MAKO, I was wondering if you could give us an update on the hip side of that business and how big of a deal do you think it is to have the Stryker hip family now available on the RIO system? And then just on the Neurotechnology business, I understand the commentary around the standard Trevo product, but how fast – sorry, have you seen any impact yet, just given the strength of the data that’s come out of those recent studies? And how fast do you think the market is growing neurovascular overall? And do you think Stryker has been gaining share?

So, on MAKO, clearly having the Stryker power brand, particularly Accolade, which has been very successful on the MAKO robot, we think it’s going to help increase the value proposition at particularly given the small clinical data, we still believe total knee is the biggest market opportunity overall, but we do think we can strengthen the interest level and momentum on the hip side as we add our proven clinical hip line to that products. On neuro, it’s going to take time with the market development. We have seen an increase in volumes in some of established stroke centers but the majority still need to work through a lot of the items that we listed off on the call around being able to have physician alignment, inter-hospital transfers and really making sure they are established as a stroke center and that’s going to take time. So it’s really focused on the longer term potential as well as some additional clinical trials that are underway including DAWN and the SITS Open trial, but those are probably not going to be completed in 2016 or even 2017. So we are building the base of data. MR CLEAN is a great study. I think it reinforces our conviction, but it will take time overall. In terms of the market, if you are talking about the ischemic segment, it’s very healthy growth. But remember the base is still very small here for the device-based treatment of that condition. So while it’s double-digit growth, it’s off of a pretty small base.

Yes. And I think one of the questions you asked was neurovascular in general I would say that the bulk of the business is really on the hemorrhagic side as you know. And we have consistently been taking market share over the past 2 years or 3 years with a slew of different product introductions around our target brand, different sizes, different shapes and that product continues to perform extremely well around the world.

Thank you.

Thank you. Our next question is going to come from Bob Hopkins from Bank of America. Please go ahead.

I am so sorry about the phone difficulties, I apologize.

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

Yes. I am afraid I am not up to the task. So two quick things, first, on the spine side, Kevin at the recent AAOS meeting, obviously this is one of areas where you have expressed a lot of excitement about the portfolio, about the sales force and about the products you have coming down the pike, I was wondering if you could just kind of set them expectations as we look forward as to when you think we could really start to see some noticeable acceleration in the spine business, is that something that you can do organically here over the next couple of quarters or do you think it’s going to take longer?

Well, as I mentioned before, I am really pleased with our spine business. Certainly, we have a very profitable business. And we have been improving our organic profile. The CoAlign acquisition was a very important one, are providing very innovative products. We have strengthened our management team at spine. And so this first quarter was, I would say a good quarter. I think we are going to start to improve over the course of 2015 and also continue to look at other opportunities to add products, whether it’s through organic or inorganic means over time. But it’s a business that’s going well. The management is in really good shape and I expect this to be a better year than we have seen in the last couple of years.

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

Yes. So what we say is at the start of any year we assume some level of buyback activity. And there is a lot of different things that factor into a range, obviously. So we say $400 million, but that could be plus or minus $100 million. And you have seen some years it’s not that and some years it could be higher than that. I think with the open authorization increase, we clearly have the ability to buyback more stock. We haven’t made any explicit changes that you should be assuming a new level because really it’s going to depend on other priorities and how big year unfolds. And it is again why we have a range of $0.15 range and obviously everything else being equal, which won’t be true but everything else being equal, we buyback more stock. It’s going have a positive impact there. But there is no explicit assumption at this point.

Okay. So there is no explicit incremental assumption in these new numbers, it’s sort of the same as it was at the beginning of year just by the authorization?

Yes. And we think we will use that up over 2 years to 3 years, which, obviously a bit – it’s a bit lower end of that we are going to have a higher level and hopefully that will translate into a better performance within the range. But there is a lot of factors in that range as you know that can offset things pretty quickly.

Great. Okay, thank you very much.

Thanks Bob.

Our next question is going to come from Glenn Novarro from RBC Capital Markets. Please go ahead.

Hi, good afternoon guys. I had a question on recon pricing, in the press release you called out recon pricing down 3% and I was wondering how is that comparing to your plan, and if you can give us any color on U.S. recon pricing whether it’s above or below the 3% you have in the press release? Thanks.

Thanks Glenn. We breakout pricing on a worldwide basis for the three business segments and you can see that in the press release. We don’t break it down further by geography. Clearly, the greatest pricing pressure is within the Ortho segment at that 3% level. No real change from quarter-to-quarter, it’s all the same trends we have seen – we have been seeing. I mean pricing got incrementally better for us, but still negative, but I wouldn’t point to any significant change in any of the business segments that would be worth highlighting as it relates to price.

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

Well, thanks. First of all, just to clarify, so if the greater than 30% growth was aided by the acquisition of SBI. So, on an organic basis, we grew around 20, still a very, very impressive number, given the multiple quarters of organic growth that had exceeded 30%. But we are really excited about the potential, we are still penetrating and new markets are very exciting because they are hard to predict. You don’t really know and as you are continuing to penetrate the market where more and more implants are being used. Getting a total ankle, it was a huge move for us. In the foot and ankle market, it was a good gap that acquisition is really just starting to gain steam. So we still think we have plenty of growth ahead for our foot and ankle division.

Our next question is going to come from Larry Biegelsen from Wells Fargo. Please go ahead.

Good afternoon. Thanks for taking the question. Some hospitals are reporting better volume in the first quarter of 2015, is that partly what drove the improvement in your Ortho numbers in Q1 and your U.S. hip number was very strong, are you already seeing the benefit from the Stryker Power brand on the MAKO robot?

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

Yes. In the U.S. our hip brands have been growing above market for about 3 years now. So this is a continuation of the strength that we have had over time.

Okay. And then that’s my follow-up. I guess I am wondering if you are seeing anything so far from the Zimmer-Biomet merger or from Wright-Tornier, anything in terms of disruption? Thanks for taking the question.

Yes. Nothing that we would point to, although it’s too early with – the deals haven’t closed and you typically see that disruption occur later in the integration process. And whether or not that translates into any shares shifts, we are not assuming that. I think we are really well positioned between our portfolio and the MAKO line and the underlying strength that we are seeing in foot and ankle. But I wouldn’t point to any disruption that we are seeing of any significance at this time.

Yes. It’s too early and certainly if there is disruption, we will be well positioned to take advantage of it. But at this point, it’s too early to see anything.

Our next question is going to come from Raj Denhoy from Jefferies. Please go ahead.

Hi, good afternoon. Wondering if I could ask a bit on MAKO, as you get closer to launching that product, the total knee on – the product in the United States, I am curious if there is anything you can share with us in terms of how you will position that product, what the attributes will be that you will stress the customers, whether it’s better alignment or better efficiencies or just anything that can support the rollout of that product?

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

Okay. When asked about kind of the products you are most excited about, I think you highlighted MAKO is the biggest one. And I am not sure if you have ever given us anything in terms of your expectations about what share you could gain or what the product could actually do for your position in the marketplace. Have you – are you ready to do that or give us anything in terms of expectations?

No, we haven’t and it’s early, obviously, we don’t have the total knee and that’s going to take time even when it gets approval, it’s going to be a methodical and measured ramp up as we train and educate. Clearly, MAKO is something we are very excited about. The ortho team is very excited about it. But if you really look at the history of Stryker, with all the different businesses and franchises we have, all rolling our products, it’s much more story about singles and doubles and the totality of all those products that drive the organic sales growth. It’s very rarely any one single product that we would point to. And while MAKO has the potential obviously to be a big driver, overall, it’s the totality of that portfolio.

Okay, thank you.

And our next question is going to come from Matthew O’Brien from Piper Jaffray. Please go ahead. Matthew O’Brien: Good afternoon. Thanks for taking the questions. Just a follow-up on Raj’s question here previously. Can you talk a little bit more specifically about the total knee rollout? I mean, we are getting fairly close I think here to getting that approval. So, once you do get the approval, how do you go out to the hospitals that already have an existing system? Is there an upgrade program that we should expect? I think the installed base is right around 250. And then are you hearing from hospitals at this point right now that are already waiting to see the total knee application before buying the system? And then I have a follow-up.

Yes, I think again it’s going to be a very measured launch post-approval. And we are still I mean we filed with the FDA stage and then when we get the clearance, we are going to have to be very measured, we are going to have to train and educate to make sure that surgeon experience is appropriate. We don’t want to mess this up. There is going to be upgrades that have to happen from a software standpoint. So, it is something as we have articulated in the past, it’s going to be a number of quarters before we start to really see the trajectory that’s indicative of us taking market share gains. And nothing has changed with that expectation. What we saw in our due diligence is a range of people. There is the early adopter with any new technology. There is those who want to see more of an established clinical brand of implants and that’s what we are doing as we add the hip power brands, for example. And then there is those who want to wait and see more indications. So, I am sure there are surgeons out there who want a total knee before they really are going to be convinced to go the robotic route. And that’s just indicative of the various ways of technology adopters you see both with the robot or any new technology. Matthew O’Brien: Fair enough. And then for my follow-up question, the Trauma and Extremities business continues to be quite healthy, that selectively is around a $7 billion category growing mid to upper single-digits. And I think your sales force is pretty established here. You have a full portfolio of products in both areas. Is this some – is this a category where over the next kind of 5 to 7 years you could essentially double your revenue base here?

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

Yes. I would see this as we see with Neurotechnology, Sports Medicine, Trauma and Extremities, these are really growth businesses for Stryker, and they have been for multiple quarters. And I think in the years ahead, we are going to continue to focus on them. If you think about upper extremities, we are still a relatively small player in upper extremities. And for us, that’s an exciting area for the next few years. There are established players. It’s not like foot and ankle, which is a brand new market. But for us, there is plenty of room to grow in the upper extremities space and even with some of the products we acquired through the SBI acquisitions, we think we are well-positioned there. So, for us, it’s definitely has been a great business for the past multiple years and we continue to see that as an exciting growth business in the years ahead.

Our next question is going to come from Ben Andrew from William Blair. Please go ahead with your question.

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

So, it was clearly a big part of our booth presence and the focus and the excitement that we saw at AOS was around MAKO, which is great to see, because it obviously reinforces our long-term conviction. We have been in the capital business for a long time with our MedSurg businesses and see a very similar pattern, where you have strong year end capital sales as hospitals are looking to use up budgets and then the appropriate drop off in the first quarter, so nothing about that sequential decline surprised us. And I think it should really be reflected in expectations going forward. Now, it’s not always going to be perfectly aligned with what we saw this year, but it’s pretty indicative of the pattern of capital sales.

Okay, that’s helpful. And then with respect to your efforts around ICG, can you touch on any – some of the product specifications of the system, how it might be differentiated in currently available technologies and how do you plan to approach the marketplace with this device?

Yes. So, I am not going to get into a lot of details as we haven’t yet launched the product. It will be launched probably in the next 6 to 12 months sometime in that timeframe. But what I can tell you is it’s going to be integrated into the light source that we have and that that will be a huge advantage versus having to purchase additional capital. And if so, we probably feel very good about and it will integrate exactly right into our light source, be very convenient, it will obviously be lower cost than having to purchase extra capital. And it will operate as you would expect, it will light up the common bile ducts that we will see very clearly as you are doing your dissection that you won’t be able to have any kind of injury. So, it’s a safety play. We are very excited about it, but again, we haven’t launched it yet. And more details will become available as we get closer to the launch.

Our next question is going to come from Bruce Nudell. Please go ahead with your question.

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

Hi, Matt.

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

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

Yes, but I would think about this more like a back order and back orders happen in our industry a lot. So, it’s not like we are off the market, it’s just that we don’t have to be a supply that we normally have people to fully meet our customer orders. So, that’s why when I – in my prepared remarks I talked about this really being a delay. And so back orders, that typically happens as you lose the sales for a period of time, but you don’t lose the sale to another company, the sale just gets delayed. And that’s what we are experiencing in the Instruments area as well as MAKO.

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

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

Our next question is going to come from Josh Jennings from Cowen & Company. Please go ahead.

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

Yes. So, we obviously don’t provide all the details by country. What I can tell you is Japan really did turn around in all of our divisions, except for Reconstructive. So, Reconstructive, given the surgeon relationships does take a little longer to sort of gain that business back, but I was very encouraged with Trauma, with Spine as well as our MedSurg businesses. The ERP systems are all resolved. We are regaining share slowly. But I would expect that certainly by the third quarter we should be back to kind of the same level of market share that we had in the past. And so I am really pleased with how the new management has approached the challenge, like I say, in Spine and Trauma, ahead of schedule, recon is going to take a little bit longer.

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

So I would say there is a small component because we did the acquisition...

CHG?

Earlier in the year, but...

It’s early in the year, but it’s largely organic growth, virtually all of its organic growth.

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

Our next question is going to come from Jeff Johnson from Robert W. Baird. Please go ahead.

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

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

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

Yes. To me it seems like a very stable market, our performance is starting to improve. And that’s what I think I spoke just earlier on the call that our management team and some of the products we have launched in the MIS space where historically we had less presence in MIS. It’s starting to help us gain momentum. So it was modestly better in the first quarter and I would expect that trend to continue.

Understood. Thanks guys.

Thank you.

And our next question is going to come from William Plovanic from Canaccord Genuity. Please go ahead.

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

Yes. So I mean, based on the numbers that Katherine was talking about, I mean we would need maybe a third of that kind of level, maybe a little bit more I guess then to offset the dilution that’s occurring at the same time from the share issuances?

So if I take your share issuances, what does that breakout into number of shares annually roughly without buyback, just what’s added normally?

It is probably – I mean it’s only – it’s just a few million.

Okay, that’s all I had. Thank you very much.

It’s not much associated with that.

It’s pretty small.

Thank you.

Okay, thank you.

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

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