Stryker Corporation (SYK) Q2 2016 Earnings Report, Transcript and Summary

Kevin A. Lobo - Chairman, President & Chief Executive Officer Timothy J. Scannell - Group President, MedSurg & Neurotechnology Glenn S. Boehnlein - Vice President and Chief Financial Officer Katherine A. Owen - Vice President-Strategy & Investor Relations

Michael Weinstein - JPMorgan Securities LLC Robert Adam Hopkins - Bank of America Merrill Lynch Kristen Stewart - Deutsche Bank Securities, Inc. David Ryan Lewis - Morgan Stanley & Co. LLC Rick Wise - Stifel, Nicolaus & Co., Inc. Chris Pasquale - Guggenheim Securities LLC Matt J. Keeler - Credit Suisse Securities (USA) LLC (Broker) Matt O'Brien - Piper Jaffray & Co. Joanne Karen Wuensch - BMO Capital Markets (United States) Glenn John Novarro - RBC Capital Markets LLC Raj Denhoy - Jefferies LLC Mike S. Matson - Needham & Co. LLC Kaila P. Krum - William Blair & Co. LLC Larry Biegelsen - Wells Fargo Securities LLC Richard S. Newitter - Leerink Partners LLC Joshua Jennings - Cowen & Co. LLC Matthew Taylor - Barclays Capital, Inc. Matt Miksic - UBS Securities LLC

Welcome to the Second Quarter 2016 Stryker Earnings Call. My name is Andrea and I will be your operator for today's call. 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 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. Kevin A. Lobo - Chairman, President & Chief Executive Officer: Welcome to Stryker's second quarter earnings call. Joining me today are Glenn Boehnlein, Stryker CFO; Tim Scannell, Group President, MedSurg and Neurotechnology; and Katherine Owen, VP of Strategy and Investor Relations. For today's call I will provide opening comments, followed by Tim with an update on our two recent acquisitions, Sage and Physio-Control. Glenn will then provide additional details regarding our quarterly results before we open the call to Q&A. With Q2 organic sales growth of 6.6%, we continue to demonstrate the strength of Stryker's diversified revenue base, which is allowing us to consistently deliver sales growth at the high end of med tech. This quarter, our growth was powered by robust performance in MedSurg and Neurotechnology, while Orthopaedics was in line. Our decentralized business model is enabling us to drive innovation and strong sales and marketing execution. On a geographic basis, organic growth was led by US, up 9%, while sales outside the US were up 2%, which is continuing to be impacted by ongoing challenges in China. Beyond the top line achievement, Q2 was highlighted by strong operational expense leverage that reflects our focus on driving cost transformation across divisions and geographies. As previously mentioned, we have a significant opportunity to deliver greater SG&A leverage on a multiyear basis with initiatives such as indirect spending, product life cycle management, and the optimization of our IT systems. As we are starting to see the impact from these initiatives, it underscores our conviction of delivering leveraged earning gains. Based on our first half performance, we now look for full year organic sales growth of 6% to 6.5% and adjusted per share earnings of $5.70 to $5.80 a share. I will now turn the call over to Tim. Timothy J. Scannell - Group President, MedSurg & Neurotechnology: Thanks, Kevin. Good afternoon. I'm excited about participating in today's call and providing you with perspectives regarding our recent acquisitions of Sage Products and Physio-Control. I will begin with Sage Products and reiterate the strategic rationale which drove this acquisition. As we articulated in February, Sage complements Stryker Medical's portfolio of innovative ICU and MedSurg products with disposables targeted at reducing never events. It also provides access to an important adjacent market that expands our hospital product offerings and improves our mix of single use versus capital products. Sage's approach to innovation focuses on demonstrating superior clinical outcomes which underscore the benefits of their products, driving customer adoption and loyalty. These innovation efforts have resulted in unique and highly trusted brands, which are an essential part of nurses' daily interactions with patients in hospital ICUs and med-surg units. Sage is number one in all the segments it serves, and we believe that in North America alone, Sage's products address a segment totaling approximately $1.4 billion. Turning to the financials for Sage, given that we closed the transaction on April 1, we are able to share a full quarter of sales results. Sage's performance was strong in Q2, with sales growth of roughly 9%. This performance was achieved while contending with an unexpected supply interruption during the quarter that was one-time in nature and has been resolved. Without the supply interruption, Sage's growth in Q2 would have been approximately 14%. Sage's success has been fueled by their commitment to innovation, which has resulted in the long history of successful new product introductions, including the recently launched AirTAP product. Using proprietary air-assisted technology, AirTAP enables caregivers to provide exceptional care by aiding in the turning and boosting of patients while the patients remain in bed. AirTAP enhances caregiver safety as it requires 80% less force to boost patients, versus a typically used draw sheet. With respect to integration, plans are underway to expand our manufacturing capacity beginning in 2018 to support expected growth. Moreover, our businesses are working to coordinate activities to accelerate revenue in areas such as key account and brand strategies. Our international focus will begin with Europe, where Sage has experienced some initial success in Canada, where they have done very well. Beyond these markets, we are working to prioritize countries which value proven clinical solutions that eliminate never events. We are excited by the cultural similarities and positive chemistry between Stryker and Sage, and expect double digit revenue growth in the second half. Turning to Physio-Control, I would like to also reinforce the strategic rationale that led us to acquire this company. As we described in mid February, Physio-Control complements Stryker Medical's portfolio of innovative and differentiated pre-hospital and hospital products, as Physio-Control is the leader in the development, manufacture and sale of defibrillators and monitors, AEDs, and CPR-assist devices. We are excited by the synergistic benefits and market strength that resulted from the combination of Physio-Control with our medical division. Importantly, the vast majority of Physio-Control sales call points overlap with our medical division call points. Physio-Control holds the number one or number two share position at every major segment it serves. We believe that on a global basis, Physio-Control's products address segments totaling approximately $1.7 billion. With Stryker's market leading powered cot and power load lift system coupled with Physio-Control's suite of defibrillators, monitors, and related products, our solution set is extensive. Our existing EMS franchises enjoyed tremendous success in recent years, with growth significantly higher than the market and Stryker as a whole. Physio-Control's business has an attractive mix of 60% capital and 40% recurring business, compared to our EMS business which is nearly 100% capital. In addition, Physio-Control has an impressive enduring competency in a robust pipeline of products that have recently begun to launch, with additional product launches slated for the next several years. We expect this refreshed product portfolio and the combination of our organizations to result in continued strong sales momentum and greater profitability leverage in the future. As a reminder, we closed the Physio transaction on April 5. Pro forma Q2 sales grew roughly 9%. On the integration front, our teams are focused on determining the optimal organizational design that best serves our common EMS and hospital customers. In addition, Physio has a significant international structure, and our medical division is assessing opportunities to drive growth by leveraging Physio's international market knowledge, strength, and operational infrastructure. We expect high single digit growth from the Physio-Control business in the second half. With these two acquisitions, the medical division is now bigger, stronger, better diversified geographically, and has more base business. Encouragingly, medical had a strong organic Q2 growth result while integrating these two acquisitions. This concludes my overview commentary on Sage and Physio-Control. Glenn will now discuss our Q2 financials in more detail.

Thanks, Tim. I will focus my comments today on our financial results and key drivers of our second quarter performance. Our detailed financial results have been provided in today's press release. For the quarter, our organic sales growth of 6.6% exceeded the high end of the range of our full-year expectations despite a tough year-over-year comparison with growth of 6.9% in the year ago quarter. The quarter included one additional selling day compared to prior year and consistent with our previous communications, the additional selling day equates to approximately 1% of additional growth. Pricing in the quarter was down 1.3% from the prior year, trending modestly better than we expected. During the quarter, we continued to see strong US sales with organic growth of 8.6%, while international sales posted organic growth of 2%, reflecting continued destocking challenges in China. Our adjusted EPS of $1.39 increased 15.8% from the prior year, primarily driven by our strong top line growth, including the impact from the acquisitions completed in the quarter. Interest related to the recent bond offering unfavorably impacted EPS by $0.05 per share and foreign exchange unfavorably impacted EPS by $0.03 during the quarter. Looking at our segment highlights, Orthopaedics delivered constant currency growth of 4.8% and organic growth of 4.5%. The top line was led by US Orthopaedics gains of 5.9%, highlighted by a 9.5% increase in trauma and extremities and a 6.8% growth in knees, as momentum continued for our 3D printed Tritanium revision cones and our cementless knee products. US hips posted low single digit growth due to softness in the revision market. Orthopaedics international delivered constant currency growth of 2.9%, led by a strong performance in our European knee business. Lastly, we placed 17 MAKO units during the quarter. Overall, our second quarter results continue to reflect strong momentum across our Orthopaedics portfolio. Our MedSurg segment's constant currency growth was 34.2%, including the impact of the recent acquisitions of Sage and Physio. Excluding the impact of acquisitions, our MedSurg business posted organic growth of 8.5%. Our US MedSurg business continued their strong momentum with organic growth of 11.1%. Instruments had solid US growth of 8% with strong performance in our power tools business, highlighted by double digit gains in our Micro Power tools. Endoscopy continued its momentum from Q1 with US growth of 10.8%, driven by continued success of our 1588 AIM video platform. Excluding the impact of the Sage and Physio acquisitions, Medical had US growth of 16.9%, driven by continued performance of its Power cot products as well as solid performance of our bed business. Internationally, MedSurg organic sales were down 0.5% for the quarter, reflecting ongoing challenges in China, primarily related to distributor destocking. We expect this to continue throughout 2016 as we work with our distributors to drive end customer demand and reduce the buildup in their inventories. Neurotechnology and spine posted constant currency growth of 9% and organic growth of 7.5% with continued strong momentum our neurotech businesses, which increased 14.4% while spine was up 1%. As with our other businesses, US neurotech growth was robust at 15.6%, which reflects the continued strong demand for our neurovascular products, the Trevo stent retriever and Target coil, our neuropowered instruments and our craniomaxillofacial fixation products. Our US spine business grew 4.8% despite experiencing product supply issues, but continues to see good demand for our newer 3D printed Tritanium products. We expect these supply issues to remain into the fourth quarter. Internationally, neurotech constant currency growth of 12.3% reflects the broader market momentum for the Trevo stent retriever and Target coil products. Spine's international growth was dampened by the aforementioned product supplies issues and continued challenges in China. Moving on to general operating highlights, our gross margin on an adjusted basis was roughly flat at 66.2%, down 180 basis points sequentially. We had another quarter of strong impact from our focus on operational efficiencies, including improved productivity and absorption. This was offset by the full impact of our recent acquisitions, including certain accounting reclassifications between gross margin and SG&A to align to Stryker policies, sales mix, and negative pricing. As for our operating expenses, we continue to focus on internal innovation with R&D spending of 6.4% of sales. On an adjusted basis, SG&A for the quarter was 34.9%, which was favorable by 120 basis points as compared to the prior year. The improvement reflects the favorable impact of SG&A leverage from our recent acquisitions, the previously mentioned reclassification of certain expenses, our sales mix, and continued focus on our operating expense improvements through our CTG program. For the quarter, acquisitions contributed roughly half of our SG&A improvement. Combined, these factors drove a 100 basis point year-over-year increase in our adjusted operating margin to 24.8%. Lastly, I will provide some highlights on our other income expenses. Other expenses increased due to higher net interest expense related to increased borrowings at the end of the first quarter. We anticipate that future quarterly interest expense will be roughly $30 million, which is consistent with this quarter. Our second quarter adjusted effective tax rate of 17.6% reflects the benefits of our global tax structure partially offset by the impact of higher US based income from our recent acquisitions. Moving on to the balance sheet, we continue to maintain a strong balance sheet with $3.5 billion of cash and marketable securities, of which approximately 38% was held in the US. Total debt on the balance sheet at the end of the second quarter was $7.6 billion. Turning to cash flow, our year-to-date cash from operations was approximately $671 million. Finally, as we had previously announced at the end of Q1, we suspended our share repurchases for the remainder of the year. In terms of guidance, based on our second quarter performance, we expect our full year organic sales growth to be in the range of 6% to 6.5% for 2016. If foreign currency exchange rates hold near current levels, we anticipate net sales will be negatively impacted by approximately 1% for 2016 with negative pricing being in the range of 1.5% to 2%. Lastly, our guidance for adjusted net earnings per diluted share in 2016 now stands in the range of $5.70 to $5.80 for the full year and we expect the third quarter to be in the range of $1.33 to $1.38. And now we'll open up the call for Q&A.

Thank you. We will now begin the question and answer session. Our first question comes from the line of Mike Weinstein with JPMorgan. Your line is now open.

Thanks. Thanks for taking the question, guys. Just want to get your thoughts on a couple of items. So number one, understand the guidance update for the year. One of the questions people are asking is just the third quarter is a little bit below where the Street was modeling, so I don't know if as you looked at Street models if there was anything in particular you thought the Street was off on relative to your expectations. And then second, the mix of growth was a little bit different this quarter if I look at Orthopaedics and MedSurg within those different businesses. Maybe there's a couple you want to comment on. There's a few that stick out to me, but I would just love to get your thoughts. Thanks.

Okay. I'll take the first one. So as we look at Q3, seasonally Q3 is usually our softest quarter. I think if you look at our guidance, it's very consistent with our Q3 guidance that we've provided in the past, especially when you look at year-over-year growth. Kevin A. Lobo - Chairman, President & Chief Executive Officer: And as to the second question, Mike, this is Kevin. I would say that from quarter to quarter you see this kind of change at Stryker, and we've seen this for the past few years where in the first quarter Orthopaedics had a more robust performance. This quarter was led by MedSurg. From quarter to quarter we see those variations. But what's encouraging to me is if you look at our growth versus the market, we continue to perform very well, especially if you look on a rolling four quarters basis.

And maybe just a couple more, Kevin, just to comment on. If I look at within different businesses, maybe some that were a bit surprising was maybe international spine, which you made some comments relative to the Orthopaedics business. There was some surprises like US hips was less than what we thought. Knees was pretty close. But there were some, relative to what we saw in the first quarter, there were some pretty good swings within the business model. Kevin A. Lobo - Chairman, President & Chief Executive Officer: Yeah so Mike, look, I'll just finish by saying in China we've had issues and challenges, and we've highlighted those in the past. That affected spine. That affected our endoscopy division. That affected our trauma division. Spine had some product supply issues which affected both our US spine business as well as our O-US spine business. And hips, as you pointed out, was a little softer this quarter, but we've led the market certainly in the US for multiple years in our hip business and it's just one quarter. So there's for me no concern there. We see these changes from quarter to quarter. And as you've seen, the resiliency of our top line quarter after quarter over the past three or four years has been very steady. So yes, there were a bit of swings this quarter, but nothing that causes me any reason for concern. We have very, very strong divisions across the company.

Thank you. Our next question comes from the line of Bob Hopkins with Bank of America. Your line is now open.

Hi, thanks and good afternoon. Katherine A. Owen - Vice President-Strategy & Investor Relations: Hi, Bob. Kevin A. Lobo - Chairman, President & Chief Executive Officer: Hi, Bob.

Hi, Bob.

So just a couple things to follow up on. One, just a little more color maybe on the US hips, recognize that you've been strong and it's just one quarter. But Kevin, you mentioned that you felt it was a soft revision market. So you feel like there was something going on with the revision market this quarter. So I was wondering if you could just give a little bit more color there. And also now that we're one quarter into CJR, maybe any thoughts from the field in terms of what you're seeing, client reaction, thoughts on how things are developing there. Thank you. Katherine A. Owen - Vice President-Strategy & Investor Relations: Hey, Bob, it's Katherine. Just a couple points. I wouldn't look at the quarter and say something particular was going on in revisions versus primary. Overall, it was a bit softer than we've seen. And much like the first quarter, it was a bit stronger than we typically see, but we're not hearing anything from the field, from our customers, that suggests something's changed. It really reinforces why you've heard us say over and over we're really focused on rolling four quarter trends, because we see this quarter to quarter variability, that taken as a whole when you look back, doesn't mean anything significant in terms of changes in underlying fundamentals. And we're not seeing anything different in this quarter other than it was obviously a weaker than normal versus Q1 being a stronger than normal quarter. In terms of CJR, as you know it went into effect April 1. We haven't seen any impact. I think it's simply too early. As you know there's no penalty until after the first full year. So it's just simply too early, but nothing has played out yet in terms of a significant change or impact on the market.

Okay. And then two other things I wanted to touch on. One was just maybe comment on gross margin. In Q1 we talked about thinking about 68% for the rest of the year and just would like to understand some of the moving parts that you were highlighting in the prepared comments. And then lastly as it relates to the deals, sounds like things are going well, Tim. Previously you guys had suggested that $0.15 to $0.18 of accretion in 2017 was a good preliminary estimate. I was wondering, from what you see today, is that still a good preliminary way of thinking about things? Or is that perhaps a conservative estimate? Thank you.

Hey, Bob, this is Glenn. First of all, if you look at the sequential drop in margin Q1 to Q2, roughly 180 basis points, I mean Q2 was really impacted by mix especially, but not just sales mix but by adding in the acquisitions. It's early and our acquisitions are off to a solid start, but that's going to impact gross margin for the rest of the year, and it impacted more than just product. We made some reclassifications to harmonize Sage and Physio accounting practices with our accounting practices. And this essentially shifted some SG&A expenses up to gross margin in order to align them with how Stryker does the accounting. It's pretty common that we do that, and we don't get a chance to really see it until we really climb into the integration work. So that's one of the things that came out. And then on top of that, I really just need to reiterate that there's a lot of other things that make our margin move around. Not just price, but FX, geographic mix really impact it. And all of those are pretty hard to forecast to sort of a single point estimate. As I think about for the rest of the year and what you should maybe think about for your model, I think we'll be in the range of this 67% range, but understand that it could trend above or below that based on all those factors that I just mentioned. Timothy J. Scannell - Group President, MedSurg & Neurotechnology: And Bob, on the deals, this is Tim speaking. The accretion assumptions you cited look good. We're on track, and we would expect you could assume those to be good moving forward.

Thank you. Our next question comes from the line of Kristen Stewart with Deutsche Bank. Your line is now open.

Hi, just to I guess go back to Bob's question on the accretion from the deal. How should we just think about I guess that accretion? Should we think about that as flowing through? I realize it's still very early compared to, think about next year, but should we think about that baseline growth? I know we've talked about this in previous calls. Or should we think about that as still a little too soon to dial in accretion above what has been generally a double digit baseline growth for you? Katherine A. Owen - Vice President-Strategy & Investor Relations: Hey Kristen, I think it's very consistent with how we've messaged before. This is obviously going to be one of the variables that gets factored in as we go through our 2017 budgeting process. But clearly, it's incremental accretion above and beyond the normal earnings power of the businesses as they stand. How much of that flows through to the bottom line, how much of that we reinvest as we think about the opportunities in front of us, all of that will get factored in and will be evident when we give the range. So I wouldn't want to say it's a one for one, just throw it on all top of a normal earnings number because we have to look at the opportunities for reinvestment, recognizing obviously it's also incremental accretion and so some portion of it is likely to play out at the bottom line as well.

Okay, and then just generally on the market trends. I was curious from a competitive standpoint now that we've had a couple quarters on which I guess Zimmer is through with its integration of Biomet, and we've seen J&J come pick up its momentum within hips and knees. I was wondering if you guys could just comment broadly if you're seeing I guess what other companies are saying in terms of them getting their momentum back. Any particular changes that have been affecting you? And perhaps on the hip side, is this a reflection of some of the other companies getting their steam or is it just simply you feel just the revision market softening? Katherine A. Owen - Vice President-Strategy & Investor Relations: Yeah, I would say again it's just a quarter that was incrementally weaker versus quarters like the first quarter where it felt stronger, but we couldn't point to any discernible change or inflection point that suggested we had a new higher growth market. The only ones that reported are us and J&J so we have pretty limited visibility until everybody else reports, but we're not seeing or hearing anything that suggests that you're seeing some dramatic market share shifts. It's generally not how things play out in the recon market. So again, we're not seeing anything that would suggest that there's anything different than the normal quarterly variability that we see play out. Obviously it's more fun when it's Q1 and it's incrementally stronger. But again, that's why we focus on the rolling four quarters.

Thank you. Our next question comes from the line of David Lewis with Morgan Stanley. Your line is now open. David Ryan Lewis - Morgan Stanley & Co. LLC: Good afternoon. Just a few questions maybe starting with Kevin. Kevin, just with the extra selling day here in the second quarter, and thinking about the easier comps in the back half of the year, by our math, your guidance for the remainder of the year implies stable comp adjusted growth for the back half of the year. Is that just kind of roughly how you see the business stability on an underlying basis into the back half of the year? Or are there chances for acceleration or deceleration? Kevin A. Lobo - Chairman, President & Chief Executive Officer: So David, since the beginning of the year, this is the second time we've moved our range upwards. And we've been delivering very strong growth throughout the year, yes. In China, and even all the emerging markets our comps will ease in the second half of the year, but we also have some challenging comps in some of our other businesses that were growing very robustly in the second half of the year. So it's a big business that we're managing, and I think if you're growing north of 6% organically while you're integrating acquisitions, I think you're doing pretty well. David Ryan Lewis - Morgan Stanley & Co. LLC: Okay. We would agree. Glenn, I think you've gotten questions on margins. But I think this particular quarter, it's sort of the mirror image of first quarter, where growth's a little weaker, SG&A control's a little better. I know you had some announcements on the ERP integration during the quarter. Can you just give us an update on where you are and sort of the ERP planning and what's the opportunity for savings for shareholders on the ERP, and when we may get an update on that number? And I have one quick follow-up.

Yeah, David, on ERP is one thing that we're focusing on relative to our CTG program. It has several facets. I would say we're in the pretty early stages of our ERP program. Obviously, when you're implementing a new commercial global footprint, it's a multiyear journey. And we're in the early stages of that. So we'll definitely keep you guys updated as that project moves forward. I think the more immediate term things to think about are indirect procurement and those parts of the project that really can have more of an impact as we roll forward in the next year. Kevin A. Lobo - Chairman, President & Chief Executive Officer: Yeah, David, what we've been signaling on our cost transformation is this is really the engine of being able to sustain leveraged earnings year after year. And so in the earlier years, you are going to see more of that savings coming through from indirect procurement and in the later years you are going to see more of that saving coming from product life cycle management and coming from the ERP benefits. But I would say it's been a real rallying force for the company, to have everybody, all the different divisions of Stryker, working on a common system which is going very, very well. And it's a shift to SAP from a company that has really no SAP today. But I'm very encouraged with the early progress and I'm very optimistic about the implementation. David Ryan Lewis - Morgan Stanley & Co. LLC: And then Katherine, just one last quick one here. The neurotech number, obviously very, very strong and obviously the driver partially is the ischemic market. I feel like in the last couple of quarters, you and your competitors have shifted away, and they're much more focused on market development from here. I wonder if you could just share with us what specifically is Stryker doing on the market development front to drive that market. And I'll jump back in queue. Thank you. Katherine A. Owen - Vice President-Strategy & Investor Relations: Yeah David, we have been for some time been messaging around the market development. But with Tim here who runs that business, I'm going to pass it over to him. Timothy J. Scannell - Group President, MedSurg & Neurotechnology: Yeah, there was a variety of initiatives out there where we're simply partnering with systems, healthcare systems, hospitals, to drive patient flow to the right centers where they're performing these procedures. It will be a multiyear process and hospitals all vary in their level of maturity, but it's a very real and big challenge to get these patients to the right centers. But our efforts surround largely education, trying to assist, trying to ask the right questions, trying to connect people with the right consultants, things like that, and make sure their stroke centers are properly operating and they're getting the patients from the ER to the cath or the interventional lab to treat these patients. So it takes many forms. It takes many years, but I think what we're seeing is steady progress chipping away, but it's going to be years and years and years of efforts here.

Thank you. Our next question comes from the line of Rick Wise with Stifel. Rick Wise - Stifel, Nicolaus & Co., Inc.: Good evening, Kevin, and hello everybody. Maybe starting off with MAKO. In an oblique way you talked about you had solid US knee numbers. Where are you in the total knee rollout from MAKO? You didn't call out MAKO as a positive factor driving knee volumes in the US. Is it a factor? Just remind us where you are in those timelines with commercialization and papers and what's next for MAKO? Kevin A. Lobo - Chairman, President & Chief Executive Officer: Yeah thanks, Rick. This is Kevin. So, today MAKO is not a huge driver because we're really in the knee business, just using it for unicompartmental knees. We do have a limited launch, and the accent is the word limited. Just a small number of surgeons who are doing total knees. Early feedback has been very positive, so we're encouraged. But the reason for the limited launch is to make sure that we work out all the workflow and define training protocols and also be able to have some publications and podium presentations. The full launch in the total knee is not until next year. Rick Wise - Stifel, Nicolaus & Co., Inc.: So you know, maybe turning to Tim and Physio. Tim, you talked about high single digit second half growth for Physio, but you also underscored the pipeline and the products coming. Can you give us any more color on the pipeline? What do we expect? When do we see it? And does that accelerate or sustain that kind of high single digit growth pace for Physio? Thank you. Timothy J. Scannell - Group President, MedSurg & Neurotechnology: Rick, I would say it would sustain that high single digit growth rate. I think what I said after the deal was announced was that it would be accretive to Stryker's sales growth rate. And I would expect over the next several years to see next generation products in each of three main categories, defibrillators and monitors, AEDs or automated external defibrillators, and circulatory assist devices. This market is now turning into a PMA market in the United States, and so these launches will be global in nature and vary in timing by market. So we're not going to be overly specific about it, but I would say we expect, again over the next four to five years, to have a consistent stream of new products which would drive that accretive sales growth out of the Physio division versus Stryker.

Thank you. Our next question comes from the line of Chris Pasquale with Guggenheim. Your line is now open.

Thanks and congrats on the quarter. I had a couple questions on Sage. First, can you give us some more color on the supply disruption in the quarter, what happened there? Timothy J. Scannell - Group President, MedSurg & Neurotechnology: On the supply disruption, from time to time each of our businesses may have some issues. In this case it was one transient in nature. It's over and that's about as far as we're going to go in terms of sharing details.

Okay. And then what's the timeline to build out Sage's presence internationally? You talked about a little bit in Europe and Canada initially. With the rest of the business, can you drop those products in your bag internationally and start to see some synergies in the next few quarters? Or is this going to be a protracted process where there are regulatory and tenders that have to go through before you really start to see that? Timothy J. Scannell - Group President, MedSurg & Neurotechnology: I think it will be a longer term process. As we've seen with all our international initiatives, it does take time. And so we do have a foothold in Europe and Canada as we talked about. Areas like Australia may be fertile ground but will take a while. Other areas like Japan will take even longer in terms of regulatory pathways. So we see great opportunity, but it's going to be a multiyear journey for sure.

Okay. And then just one quick one, if I could, on China. Do you guys have any visibility at this point where inventory levels stand and what your underlying growth in that market might be, excluding these drawdowns? Just to give us a sense of how close we might be to seeing a turn there. Kevin A. Lobo - Chairman, President & Chief Executive Officer: Yeah, so what we've been saying now for the past few quarters is we did expect this to be a very soft quarter in China, so it was in line with our expectations. We do expect sometime in the back half of the year that we'll start to reach bottom and that we'll return to growth. We don't have the precision, just based on having multiple tiers of distributors, we don't have precision to be able to identify that exactly, but you should see signs of improvement. Certainly while we exit the year and going into next year, we should bottom out sometime in the second half.

Thank you. Our next question comes from the line of Matt Keeler with Credit Suisse. Your line is now open. Matt J. Keeler - Credit Suisse Securities (USA) LLC (Broker): Hey guys, thanks for taking the question. First on the ex-US knee performance, you mentioned strength in Europe. Can you give us any more color around that? Was that market strength? Are you taking share? Katherine A. Owen - Vice President-Strategy & Investor Relations: I think at this point it's just tough to know until everybody reports. We add up the numbers similarly and get a better sense of share shift at that point. So there's nothing specific that we would point to. We obviously have better execution now under our TOM model, which has helped a number of our businesses. But we'll know in a couple weeks if there's anything more beyond market growth versus share shift. Kevin A. Lobo - Chairman, President & Chief Executive Officer: Yeah, it's important just to note that we have a few of our businesses that are really underrepresented in Europe, our endoscopy division, our instruments division, and knees, where the market shares that we have are certainly much lower than they are in other parts of the world. So when we produce a good growth number, it's really just sort of getting back towards what we would consider our fair share. And it's a very encouraging sign and we're pleased with some of the hiring that we've done in Europe and starting to build that business. Matt J. Keeler - Credit Suisse Securities (USA) LLC (Broker): Okay, thanks. And then just a separate question on neurotech. Growth is very strong in the quarter but it slowed versus last quarter sequentially. Can you give us any color on the sub-segment growth rates in neurovascular and CMF and what drove that slowdown in growth? Timothy J. Scannell - Group President, MedSurg & Neurotechnology: There would be nothing I would point to. I think, as Katherine has talked about in some other areas, the growth rates can vary. It could be based on comps or different countries that did better or worse, or what have you. I think if we dug down into the numbers, CMF might be up a smidge and neurovascular down a little, but nothing that would point to any dramatic shift. I think in general we've had very, very strong performance and to me the good news is that that continues. Kevin A. Lobo - Chairman, President & Chief Executive Officer: Yeah. It's important to know all three of those groups, so neurovascular is of course the biggest one, the neuro powered tools as well as CMF. They're all double digit growers. And so from quarter to quarter, as Tim mentioned, some are a little higher, some are a little lower. We had a 20% comp almost in the United States from the prior year and we continue to grow strong double digits on top of strong comps.

Thank you. Our next question comes from the line of Matthew O'Brien with Piper Jaffray. Your line is now open. Matt O'Brien - Piper Jaffray & Co.: Afternoon. Thanks for taking the questions. Just with Tim in the room, I'd love to hear a little bit more about the MedSurg strength in the quarter. As you were integrating Sage and Physio, did you get any kind of benefit, either from a sentiment perspective from hospitals about adding those businesses? And then as we think about things going forward on an organic basis, now that you can bundle all of these things together, can you still deliver this mid or even upper single digit growth out of MedSurg going forward? Timothy J. Scannell - Group President, MedSurg & Neurotechnology: Well, to add a little bit of color, first I would say we're delighted with the performance of our medical division in the quarter, that they delivered strong core growth while dealing with the challenges of these two large integrations. Their EMS business did particularly well and they performed nicely in their core bed and stretcher business. Endoscopy is having an excellent year. Their core visualization business is performing exceptionally well with the 1588 camera. The communications business is doing well and the sports business is doing well there as well. I would point back to a couple deals we did in 2014, Berchtold and Pivot. These both are kind of in the mainstream now of being integrated and our team is fully in line with their products. So the Berchtold lights, booms and tables have sold well this year. The Pivot products have done very well in our hands as well. And over at Stryker Instruments, this has been a steady, strong performer over time. Their personal protection and fluid waste management businesses were real highlights in the quarter. We do expect a strong second half there as they'll be launching their Neptune 3 fluid waste management system in the coming days. So, I think across the board we were strong. I would also frankly note the sustainability business had a strong quarter and they've done well with recent product launches. And importantly, reprocessed products from Stryker have been embraced as a high quality solution by our hospital customers despite the fact that that's a challenging and difficult market. I would tell you no, there wasn't really any sentiment in favor of Stryker as a result of these deals, but importantly, we've had strong execution across the board, good new product flow, and we're optimistic about the rest of the year. Matt O'Brien - Piper Jaffray & Co.: Helpful. And then just shifting over to the trauma and extremities business. Still solid performance there, but on a two-year stack basis, that growth rate did decelerate here in Q2 versus the last few quarters. Is there anything going on there competitively of note that could prevent you from sustaining this share taking position you've been in for a while and getting, still outperforming the overall market growth rates, or should we expect more market growth rates from you from trauma and extremities? Katherine A. Owen - Vice President-Strategy & Investor Relations: Well we feel really pleased with the performance for both trauma and extremities businesses, but obviously the extremities base has gotten much bigger now. So you're looking at more challenging comparables that's still growing very solid double digits. And trauma we continue to see strong performance for that business as well. There hasn't been any meaningful change. We still feel good about the way those businesses are positioned. But obviously the law of large numbers sets in and the comps become more difficult. But beyond that, no. There's nothing we'd really point to. Kevin A. Lobo - Chairman, President & Chief Executive Officer: Keep in mind, we did have a 18% comp in the United States in trauma. So we had a really huge growth in the prior year and still strong growth. We still believe this is going be a growth business for the company. So, and it's just one quarter. It did decelerate a little bit, but certainly a very impressive number nonetheless.

Thank you. And our next question comes from the line of Joanne Wuensch with BMO Capital Markets. Your line is open.

Good evening everybody, and thank you. In looking at your spine business, that accelerated a little bit last year, it seemed through innovation and some better execution but slowed down a little bit this year, year to date. How are you thinking about that in terms of internal versus external development? Katherine A. Owen - Vice President-Strategy & Investor Relations: You're right. We have invested a lot, in terms of the pipeline, in launching new products. As we mentioned, we did have some supply disruption that will continue into the second half here. As you know, we prioritize M&A across all the businesses, but we also invest in those businesses in order to be able to deliver results based on internal innovation and R&D. So don't think about that business any differently than other areas where we look at opportunities. As you know, we have BD people in all the divisions looking at targets, but also assessing that around opportunities to invest internally and grow the business organically. Kevin A. Lobo - Chairman, President & Chief Executive Officer: I would also, I'd just like to repeat what was mentioned earlier that we did have some product disruptions in the quarter in our spine business. The underlying business is in really solid shape. I feel great about the leadership team, the new products. We have some supply challenges and that will continue in the third quarter and then it'll start to improve in the fourth quarter.

Thank you. And then just to turn back to the gross margin moment, is there a way to peel this apart a little bit to understand the impact of some of the acquisitions or the recategorization may have had on that? Thank you.

Yeah, I think if you think about the sequential change from Q1 to Q2, acquisitions in total were roughly sort of half of that change. And that should continue through the rest of the year in terms of the total growth, impact on the total gross margin. Katherine A. Owen - Vice President-Strategy & Investor Relations: Just keep in mind, when you get that hit at the gross margin, those are also lower SG&A businesses, so part of that big impact, the big SG&A decline as a percent of sales in the leverage is the flip side of that, where you're seeing the benefit both from a product mix as well as the reclassifications.

Thank you. And our next question comes from the line of Glenn Novarro with RBC Capital Markets. Your line is now open.

Hi. Good afternoon. Two questions on Ortho. First, Ortho pricing down 2.2% in 2Q, versus down 1.7% in 1Q. Is there anything unusual happening there, or is that just quarter to quarter fluctuations? And then on robotics, you sold 7 in 1Q, up to 17 in 2Q. Maybe talk about the momentum there with these outright sales and what's the pipeline looking like in terms of robotic deals in the back end of the year? Thanks. Katherine A. Owen - Vice President-Strategy & Investor Relations: Yes. So to take the first question, no I wouldn't read anything into 1.7% versus 2.2%. It's within the normal variability that we have historically seen, much like total pricing trending less negative, but still within the range of that 1.5% to 2% that we think about. Yes, very pleased with the robot placement and the fact that we have the early observational studies underway in the limited launch. The order book looks strong. We're excited about the outlook there as we prepare, as we talked about, to going to full commercial launch in 2017.

And then quick follow-up for Glenn or for you Katherine. You had the extra selling day in 2Q. Is everything normal for 3Q and 4Q? Katherine A. Owen - Vice President-Strategy & Investor Relations: Yes. So if you think about it, there was no difference in selling days in the first quarter, whether you look at it US, O-US, worldwide. Second quarter we had one extra selling day, which equates to 1% impact overall in our businesses. And then Q3, Q4, there's no difference in selling days US, O-US, or worldwide.

Thank you. And our next question comes from the line of Raj Denhoy with Jefferies. Your line is now open.

Hi, good afternoon. Couple questions if I could. So the spine product issue you had in the quarter, perhaps you could provide a little bit more about that. Was that related to the 3D products that you've rolled out or was that something different? Katherine A. Owen - Vice President-Strategy & Investor Relations: No. We're not going to get into too many details just for competitive reasons. We do have a supply disruption issue and some supply challenges. We'll work through those in the third quarter. We did highlight the Tritanium product, and a lot of momentum around that, excited about what that product will do for that portfolio. But not going to go into additional details other than to say you should assume the impact lingers into the second half of this year.

Okay. And then just for my second question, Medtronic obviously made some noise in June about coming into the orthopedic market. Curious if you've seen anything, one. And two, if you have any thoughts just around what Medtronic would mean for this market. Katherine A. Owen - Vice President-Strategy & Investor Relations: No, we haven't seen any impact and they'd obviously be better positioned to talk about where they are in the launch or signing up customers. So today, no, we don't see any impact. Obviously we believe in the value of the rep and as well as innovation in this market and we're really going to focus on just that and the MAKO total knee launch, which we think has the opportunity to be truly disruptive in the reconstructive market.

Thank you. And our next question comes from the line of Mike Matson with Needham & Co. Your line is now open. Mike S. Matson - Needham & Co. LLC: Hi. Thanks for taking my questions. I guess I just wanted to start with MAKO and thinking through the total knee full launch next year. I guess to what degree do you think the need to sell the very expensive capital equipment or the robots will limit the growth or limit the rate at which you can take market share in the knee market? And is there anything you can do to potentially speed up those placements in order to capture more of that knee implant share? Katherine A. Owen - Vice President-Strategy & Investor Relations: Yeah, so we're selling the $1 million robots right now. We did 17 this quarter, and that's before we've gone into full commercial launch for what we think is the biggest driver in value with the MAKO opportunity. And moreover, we've been selling very expensive capital in our MedSurg businesses for literally years and years. So we understand how to sell capital. It is fundamentally different than selling implants or disposable, which is why we have a separate dedicated salesforce. We also have for a number of years now had a flex financial group within the Stryker organization, and our MAKO group is using that to leverage their expertise to offer different options to our customers whether they want to buy outright or lease. And so that expertise that's been developed for a number of years through MedSurg is clearly enabling a different type of discussion with customers than was possible when MAKO was a standalone. So we feel really comfortable in our ability to sell capital and the value proposition that's driven by the different applications that will exist on the MAKO robot. Mike S. Matson - Needham & Co. LLC: I guess what I was getting at is, if you came out with a new type of a knee implant, you could walk into an operating room and the doctor could switch to that new implant on day one, whereas if they're going to switch to MAKO, they've got to convince the hospital to buy a really expensive robot first. So that's going to kind of slow down the ability to take knee market share, is it not? Katherine A. Owen - Vice President-Strategy & Investor Relations: Yeah, to be able to do a robotic knee, you have to buy the robot and it will be a closed system and can only use our knee. So that's part of the value proposition. We go in and we have that discussion and articulate the benefits here. So this is very different than just simply coming out with a new knee and not having to buy capital. Yes, that's correct. But it's also very different in terms of the value that we think we'll bring forward and will start to get evidence of as we do these observational studies and look at benefits around less tissue disruption, improved alignment, a number of different factors that we think will help support the value proposition. Mike S. Matson - Needham & Co. LLC: All right, thanks. And just if international growth were to improve, what would that do to your gross margin?

Generally international flows through gross margin at roughly the same rate that we're experience on an average here. It would roughly flow through at about the 67%. It really depends sort of where internationally, as well too, because certain emerging markets are better. European pricing impacts are usually higher. But up and down from the 67%, that's roughly a good ballpark estimate.

Thank you. And our next question comes from the line of Kaila Krum with William Blair. Your line is now open. Kaila P. Krum - William Blair & Co. LLC: Hi, guys. Thanks for taking my questions. One spine question and then one on the medical business. First, I mean, what are you seeing sort of in the spine market broadly from a competitive perspective? And really I'm curious about your thoughts on sort of that multiyear robotic movement that now several companies are talking about in that space specifically. Kevin A. Lobo - Chairman, President & Chief Executive Officer: Yeah, we really like that many companies are talking more and more about robotics. I think that provides a real good tailwind for MAKO. We believe we have certainly the best system with haptics and really terrific intellectual property. And so the more that robotics become a positive word out in the medical technology community with our customers, I think that provides a real good tailwind for us on MAKO. We're not seeing anything new in the spine market. It's a tough market with many competitors. We like our ability to win in the market based on the innovations that we've been bringing forward over the last two, three years. We did have our own challenges, as we've mentioned a couple of times on the call related to supply disruption, but nothing really new from a competitive standpoint. Kaila P. Krum - William Blair & Co. LLC: Okay. And then just a follow-up on the recent acquisitions in the medical business. I mean, just looking at the pro forma growth rates you gave us in the quarter, understanding we're obviously early in the integration process, but with that in mind, I mean how do you expect those pro forma growth rates to trend in the coming quarters? I mean should we expect modest dislocation before an acceleration or just consistent growth with typical seasonality in Q3 and Q4?

Yeah, I'd say, I guess my answer would be consistent growth in Q3 and 4 tied to that, those numbers we cited of high single digits and double digits.

Thank you. And our next question comes from the line of Larry Biegelsen with Wells Fargo. Your line is now open.

Good afternoon. Thanks for taking the questions. First, international. Kevin, I think you said last quarter emerging markets were down in the high single digits in the first quarter. Was it similar in Q2? And by our math, Europe was also a little soft in Q1. How was Europe in Q2 and what's the outlook there? And I did have one follow-up. Kevin A. Lobo - Chairman, President & Chief Executive Officer: Yes, I'd say emerging markets, it was a very similar story in Q2 as it was in Q1. It was just as bad a quarter. As it relates to Europe, Europe had a mid single digit growth in the second quarter, so we were actually very pleased with the second quarter performance. There was a little bit of softness in the first quarter and it got back on track in the second quarter.

That's helpful. And then for Tim on the ischemic stroke market, could you talk a little bit about how that market has been developing in 2016 versus a strong 2015? In terms of patient numbers treated in the US, it was probably up 30%, 40% from about 12,000 to 16,000, 17,000 last year. Is 2016 looking like as strong a year just from a ischemic treatment, endovascular treatment of ischemic stroke? Thanks a lot. Timothy J. Scannell - Group President, MedSurg & Neurotechnology: Yeah, I think the growth trends have been similar this year to last year. And certainly further to this law of larger numbers and what have you, the growth rates arguably would diminish with time. But it continues to be a very robust market with very significant growth opportunities lying ahead of us.

Thank you. And our next question comes from the line of Richard Newitter with Leerink Partners. Your line is now open.

Hi. Thank you for taking the questions. I have two. The first one, just to follow-up on the robotics question and the competitive landscape. Just specifically with respect to spine, can you talk to us a little bit about what your view is of spine robotics technologies in light of recent investments that others are making there? And then I'm more just thinking if and when you potentially adapt a MAKO solution to spine, what area or in what capacity do you think that could add value to the procedure? Then I have a follow-up. Katherine A. Owen - Vice President-Strategy & Investor Relations: Yeah, I think it's just early right now. There's been a lot announced, but there hasn't been a whole lot launched. And so I think we're just going to have to wait and see, and do they truly facilitate making the procedure easier or enhancing the outcomes. We do believe there's opportunity for robotics when we look at MAKO in spine, but it is not the focus right now. We are completely focused on the opportunity in recon, and particularly gearing up for the total knee launch. So it's certainly something that we're going to evaluate, but near term it is not the focus.

Okay. Thanks for that. And then just a second one, someone asked a question earlier about Medtronic getting into hips and knees eventually. I guess my question to you is Medtronic talked about a risk-sharing model. Can you talk a little bit about what, if anything, Stryker is thinking about doing and potentially going at risk with the hospital in an episode-of-care payment situation? Katherine A. Owen - Vice President-Strategy & Investor Relations: Yeah, we have done that. We've had our Stryker Performance Solution group within the company now for a number of years. They go at risk. We've got convener status. Under the prior program, we're able to share with customers. So this is something that through that SPS, we've got a lot of institutional knowledge. We obviously have a very deep understanding around the reconstructive procedure, what the value drivers are through the entire episode of care, both in the acute and the post-acute setting. So given our long history in ortho, we think we're well positioned on top of the expertise we developed over recent years through our Stryker Performance Solution to really go in and partner with customers, and sometimes go at risk and at others construct models that help them maximize the value chain. Kevin A. Lobo - Chairman, President & Chief Executive Officer: We just haven't talked about it a lot since it's not an enormous part of our business, but we have the capability. We're already doing it and we certainly are having more and more conversations with customers as the CJR rolls into effect.

Thank you. Our next question comes from the line of Josh Jennings with Cowen & Company. Your line is now open. Joshua Jennings - Cowen & Co. LLC: Hi. Good evening. Thanks a lot for taking the questions. I just wanted to follow up on, Kevin, your comments on Europe and stronger growth in Q2 from Q1. And I think this is the second quarter post annualization of the Transatlantic Model Initiative. Are you beginning to see more benefits in Q2? And do you think we should, should we think about your European business continuing to potentially accelerate or at least continue to get, receive benefits from this Transatlantic model? I just wanted to see if there was an update there. Kevin A. Lobo - Chairman, President & Chief Executive Officer: Sure. So first, rather than just focus on the first quarter, I think we had a very successful year last year in the first year of the Transatlantic model, but it wasn't across every business. And we still have a number of businesses that have good growth in front of them. I highlighted knees. I highlighted instruments, and even part of our endoscopy division still has significant growth. So to us, we look at Europe as being a growth market, just given our relatively lower market shares, and we see it as a growth market for the next several years. So regardless of what's going on with Brexit or anything else, our relative low market share creates a big opportunity and this model that we've implemented we feel is contributing to the growth that we're experiencing and will continue to deliver high growth or higher than we've experienced over the past decades in Europe. So it continues to be a growth market. Joshua Jennings - Cowen & Co. LLC: Great. And I just had one follow-up on, with pricing, in the press release you called out a 1.3% headwind in Q2. And I was hoping to just get your thoughts on what you're seeing in the market. I know there's a lot of different sub-segments within your business, but I guess from a high level, how should we be thinking about the sustainability? Is this a new level? Is there anything to call out in the quarter? And just what you're seeing out in the market from a pricing standpoint. Thanks a lot. Katherine A. Owen - Vice President-Strategy & Investor Relations: Yeah, if you look in the – we break out the pricing and it tends to be more negative in Ortho versus MedSurg, but there's been no real change. Yes, it's trending slightly better or slightly less bad at 1.3% versus the 1.5% to 2% range that we forecast. But we've also seen quarters not too far back where it trended a little bit worse and came in north of 2%. So it's within tens of basis points at the range we're targeting. And there's so many variables between mix, both product as well as geographic that play in there that I wouldn't view this as indicative of some new trend line. I think 1.5% to 2% is a good number to focus on.

Thank you. And our next question comes from the line of Amit Hazan with Citi. Your line is now open.

Hi, this is Lee Preston (59:38) on for Amit. I wanted to touch on two things from mix. It seems like some of your competitors' data for product mix has been pretty much ceased to be a positive tailwind. It's pretty much flat now. I know you guys used to talk about it in that kind of positive 2% range, and it was offsetting price headwinds at about the same level. I realize you might not want to throw out a specific number, but directionally are we still in the same ballpark with the product mix that we had been in the past several years, around that positive 2%? And what are your thoughts on sustainability of positive product mix going forward? This is for hips and knees specifically. Katherine A. Owen - Vice President-Strategy & Investor Relations: Okay. So when we report price, and I know some companies do it one way, some companies do it the other, we report pure price and then the other number is volume and mix together. So price is negative, pure price negative, in Ortho, and it is offset obviously by volumes and to a lesser degree by mix. There hasn't been a big change in that in recent years, in terms of the overall impact of those items.

Okay. And then I have one follow-up. If you think about CJR next year, do you expect your mix of standard versus premium implants to change at all within your CJR customers for hips and knees? Katherine A. Owen - Vice President-Strategy & Investor Relations: I think it's early. We'll see what happens next year when they start to go into the penalty phase. Again, we really believe based on all our research that the focus there is going to be much more in the post-acute setting since 50% to 60% of the costs lie there for the total procedure, and there's tremendous opportunity to take cost out when you look at the post-acute setting and the number of patients who get discharged to a rehab facility versus home care. That's where we think the biggest focus is going to be, because that's where the biggest dollars are.

Thank you. Our next question comes from the line of Matt Taylor with Barclays.

Hi, thanks for taking the questions. Can you hear me okay?

Yes we can.

Great. I was wondering if you could just comment reflecting on the first half, just on utilization more broadly. Are you seeing anything different in the US market, it would be a little bit stronger than you would expect? Or you guys are seeing good execution and product updates (61:48)? Katherine A. Owen - Vice President-Strategy & Investor Relations: Yeah, there's been no real change in utilization. Obviously hip utilization was a little bit lower in the US in the second quarter, but no, there has been no overall change in underlying demand across the businesses. It does vary bit to bit. Obviously the demand is going to be greater in something like ischemic. But no, there's been no fundamental change.

And once you get through the drawdowns in China, what kind of growth do you expect for your businesses in that market? Or what visibility do you have on the end markets there? Katherine A. Owen - Vice President-Strategy & Investor Relations: I think we'll have a better sense once we get through that. We're focused right now on really getting to the appropriate inventory level, and getting a much better sense of end user demand, because there is this distributor layer there. So it's difficult to predict right now. The comps get easier in the second half, but beyond that, we just don't have the visibility to say what true end market demand is going to be. As we start to get better visibility into the channel, we'll be able share that with you, but it would be premature to throw a number out. Kevin A. Lobo - Chairman, President & Chief Executive Officer: And the area that's sort of the most hard to predict is capital equipment. I think on the disposables and the implants side of the business, we see that sort of, that's still, those markets are actually still fairly healthy and we expect that to continue going forward.

Thanks.

Thank you. And our next question comes from the line of Matt Miksic with UBS. Your line is now open.

Hi. Great. Thanks for squeezing us in. So I had one follow-up on orthopedic growth from Q1 to Q2. And I guess when we do the math on J&J's numbers, let's let you look at knees in the US, and adjust for selling days, adjust for price, it was a deceleration from Q1 to Q2. And you clearly, A, you've accelerated and B, you're also just growing at a higher rate. But I'm curious, is that feel in the marketplace to you like share gains in terms of accounts or mind share somehow? Or do you get the sense at all that there was, you know what the overall market was like? I know this is an (63:54). Just love to get what your perspective is on their deceleration and your sort of call it modest acceleration after adjusting for days. Kevin A. Lobo - Chairman, President & Chief Executive Officer: Yeah, so this is really our fourth really good performance in these, fourth quarter in a row of really strong performance. And we tend to attribute that much more to the launch of our cementless cones and the cementless knee business are really picking up. So our 3D printed products. We really believe that that's a big part of this and we also get a bit of a MAKO halo impact. So not specifically just the volume that's coming from our unis, but also wherever we put MAKOs, we tend to drive a higher mix of our business. So rather than comment on one particular competitor, I would just point out that our business has really picked up, and it's been multiple quarters now in a row of strong performance, really linked I believe to new products and the halo impact of MAKO.

Great. And then just one follow-up, if I could. And I have a feeling the answer is going to be it's early around bundled payments. But speaking to folks in the field and working at some of these hospitals, either through BPCI or starting to consider how to tackle CJR, there is some thinking that there are centers that are just going to look at this and say we don't do enough of these procedures maybe to keep doing hips and knees, and maybe start shifting those procedures elsewhere in the network or upstream somehow. Again, I know it's early, but could you give some perspective on how you think that may play out in the market, because it's so much of the volume in orthopedics in the US is done by sort of lower volume centers. Katherine A. Owen - Vice President-Strategy & Investor Relations: Yeah. It is early, so it's an accurate comment. Could we see in some hospitals a shift? It's possible. But I think it's too early to say that that's going to be a discernible enough trend or how it impacts the volumes of hospitals where it shifts to, to make any big comments on it. I'm sorry. We just don't have more insights yet given the early stage combined with the fact that there's no penalty in the first year.

Thank you. There are no further questions at this time. I will now turn the conference back over to Mr. Kevin Lobo for any closing remarks. Kevin A. Lobo - Chairman, President & Chief Executive Officer: So thank you all for joining our call. Our conference call for the third quarter 2016 results will be held on October 27. Also, our analysts meeting and product fair will be held on November 9 at our Orthopaedics headquarters in Mahwah, New Jersey. Thank you.

Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.