Jan 27, 2009
Executives
Stephen MacMillan - President and CEO Katherine Owen - VP, Strategy and Investor Relations Dean Bergy - VP and CFO
Analysts
Bob Hopkins - Banc of America Securities Mike Weinstein - JPMorgan Raj Denhoy - Thomas Weisel Partners David Roman - Morgan Stanley Bruce Nudell - UBS Securities Ed Shenkan - Needham & Company Joanne Wuensch - BMO Capital Tao Levy - Deutsche Bank Michael Matson - Wachovia Capital Markets Matt Miksic - Piper Jaffray Rick Wise - Leerink Swann Jeff Johnson - Robert Baird Doug Schenkel - Cowen and Company Kristen Stewart - Credit Suisse Bill Plovanic - Canaccord Adams
Operator
Good day ladies and gentlemen, and welcome to the fourth quarter 2008 Stryker earnings conference call. My name is Amity and I'll be your coordinator for today.
At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference.
(Operator instructions). Certain statements made in today's conference call may constitute forward-looking statements.
They will be based upon management's current expectations and will be subject to various risks and uncertainties that could cause the company's actual results to differ materially from those expressed or implied in such statements. In addition to factors that may be discussed in this call, such factors include, but are not limited to: further weakening of economic conditions that could adversely affect the level of demand for the company's products, pricing pressures generally including cost containment measures that could adversely affect the price of or demand for the company's products, changes in foreign exchange market, regulatory actions, unanticipated issues arising in connection with clinical studies and otherwise that affect United States Food and Drug Administration approval of new products, changes in reimbursement levels from third-party payers, a significant increase in product liability claims, changes in financial markets, and changes in the competitive environment.
Additional information concerning these and other factors are contained in the company's filing with the United States Securities and Exchange Commission, including the company's Annual Report on Form-10K and Quarterly Reports on Form-10Q. Today's conference call will also include a discussion of adjusted net earnings from continued operation for the fourth quarter and year ended December 31st, 2008 and the comparative year ended December 31st, 2007.
Further, discussion of these non-GAAP financial measures including GAAP reconciliation's that appears in the company's Form 8-K filed today with the United States Securities and Exchange Commission, which may be accessed from the for investor's page on the company's website at www.stryker.com. I would now like to turn the presentation over to your host for today's call, President and CEO of Stryker, Mr.
Stephen MacMillan. Please proceed sir.
Stephen MacMillan
Thank you. Good afternoon and welcome to Stryker's fourth quarter 2008 earnings report.
With me today are Dean Bergy, our Vice President and Chief Financial Officer, Curt Hartman, Vice President, Finance and Katherine Owen, Vice President of Strategy and Investor Relations. As you are aware, Dean will be stepping down from his role as CFO at the end of Q1 '09, though we will continue to benefit from his considerable insights, as he will remain as an adviser to our team.
I would like to take this opportunity to publicly thank Dean for all of his support and leadership over the years. His contribution to Stryker has been considerable.
We would also like to formally introduce Curt Hartman to the investor community. As many of you know, Curt is a long time veteran of the organization, having most recently run our very successful instruments division and his operational expertise will play a critical role as we look to drive continued margin improvements and operational excellence going forward.
Turning to the review of our quarterly results, it's clear that 2008 presented us with unprecedented internal and external challenges, including a global economy that contracted sharply in Q4, the considerable and rapid strengthening of the US dollar, the Trident Hip recall early in the year, $50 million to $55 million of incremental investment in compliance, and the Department of Justice monitoring costs. Despite these significant challenges, as an organization we still deliver top tier results, with our eighth consecutive year of double-digit sales growth at 10.5 % in constant currency, reflecting the depth and breadth of our diversified sales base that resulted in six of our eight key franchises achieving sales growth above 10% for the year.
Although our earnings per share growth for 2008 is below our original target, at an increase of 18%, we demonstrated our ability to consistently deliver robust earnings growth that compares favorably to our Medtech peer group even during an exceptionally turbulent environment, both internally and externally. On a geographic basis, growth was again reasonably balanced with the US posting an 11% increase for the year, while international was up 13% reported and 9% operationally.
Looking at Q4, US sales were up 7%, while international was up a solid 9% operationally, though was down 2% as reported, due to the substantial strengthening of the dollar. Our diversified footprint remains a key competitive advantage, as it limits the overall impact from a slowdown in specific divisions.
During the fourth quarter, five of our eight key franchises posted double-digit constant currency worldwide growth, led by our stellar spinal franchise, which was up 17% globally and a robust 20% in the US, despite very difficult year-over-year comparisons. Spine continues its multiyear track record of 20% or greater growth.
Globally, our knee franchise continue to gain share with 15% growth operationally, while hips were flat operationally recognizing the tough year-over-year comparisons. CMF and trauma were also strong contributors in the quarter, both up 12% operationally.
In total, our orthopedic implant business was up 4% reported in fourth quarter and 9% operationally. As we detailed in our earlier press releases, the challenging economic environment placed considerable pressure on hospital capital budgets during Q4, which translated into slower growth for two of our MedSurg businesses.
Though even here, the increasing strength of our diversified product line and geographic makeup came through. Specifically, while our endoscopy and medical businesses both declined modestly in the United States, each achieved double-digit operational growth outside the US, thereby cushioning the impact of the US softness.
Meanwhile the biggest leg of our MedSurg business, our instruments franchise achieved stellar US growth of 18% but was actually soft overseas. Overall, we believe our fourth quarter and full year results speak to the strength of our unique footprint, which helps drive consistency in our sales and earnings growth by limiting the impact from a slowdown in a specific division, while providing opportunities to enter adjacent markets.
As a company, we have a history of delivering a steady flow of new products that both expand markets and drive share gains. Lastly, we continue to see opportunities for geographic expansion in all of our businesses, with particular opportunities for our MedSurg businesses outside the US.
With that, I'll turn the call over to Katherine.
Katherine Owen
Thanks, Steve. I'd like to provide update on our compliance initiatives, endoscopy's, new product launch in OP-1, all of which are tropical items in our warehouse.
As many of you are aware, we currently got three warning letters which drove our decision to undertake a comprehensive approach to compliance. These efforts which include implementing a common set of quality standard throughout our company, allow us to not only address the issues raised in the warning letters, but are also galvanizing the organization around moving towards excellence and compliance.
We invested an incremental $50 to $55 million in 2008 in compliance versus 2007 and expect the 2009 incremental investment versus 2007 to be in the $60 to $90 million range. Encouragingly, during 2008, we had twice as many FDA inspections of our facilities compared to the prior year and we think we are demonstrating meaningful progress.
However, we still have work to do as evidenced by the Q4 recall of one of our CMF products. This product was manufactured and supplied to us by a vendor that recently received an FDA warning letter underscoring the importance of our compliant efforts, which includes validating our vendors in order to improve product quality.
2009 represents a year two of a three-year intensive compliance initiative recognizing we expect to make ongoing investments beyond that time frame. Our goal for 2009 is to have successful re-inspections of our facilities with warning letters and to achieve a compliance model that will drive greater operating efficiencies in 2010 and beyond.
As is our policy, we will not get into any specifics regarding possible re-inspection dates or confirm whether or not anything has been scheduled. Rather, we'll report back to you in a timely manner, pending receipt, tangible results from the FDA regarding our compliance program.
On the new product front, we wanted to highlight the recent launch of endoscopy's new 1288 HD 3-Chip camera which was rolled out to our sales force in just the past few weeks. If those of you who have followed our company for some time are aware, fluctuation in its endoscopy sales growth is primarily a function of new product launches, particularly when we introduce the next generation camera.
The 1288 is able to capture images at a higher resolution via a 1920 by 1080p resolution, which we believe yield the picture quality that is unmet by our competitors. In addition to the camera, we are launching our 26 inch HDTV wide wireless monitors, which in conjunction with the 1288, is the first HDTV wireless system in the surgical marketplace.
The system delivers HDTV 1080p resolution in an un-tethered manner, throughout the operating room. Finally endoscopy is rolling out its L9000 Light Source, which is the industries first surgical LED Light Source.
The L9000 provides unmatched light output, but is cooler than xenon. In addition, it's eco-friendly and cost effective and that the bulb never needs to be changed.
Although, we expect the current capital spending environment to limit the initial uptick for these new product launches. As we enter the second half of '09 and move towards 2010, we believe this exciting new portfolio endoscopy offerings will be an important growth driver for the division.
For those of you attending next month American Academy of Orthopedics Surgeons Meeting in Las Vegas, we will be hosting booth tours, where you can see new product launches, including endoscopy's 1288 camera and related offerings. Regarding OP-1, on our last call we informed you that our PMA submission, including the additional prospective data we collected, would be reviewed by the FDA, Orthopedic and Rehabilitation Devices Panel on February 3rd.
Owing to scheduling conflict, the FDA had since informed us that the panel will be rescheduled to March 31st, 2009 in order to ensure the appropriate personnel can be a attendant. Although, there is still uncertainty regarding both the outcome of the panel and the FDAs opening decisions decision regarding the PMA submission, we remain encouraged that we will have an opportunity to present the broad data package.
As has been our policy, it would not be appropriate to discuss the specifics of the trial, including our decision to collect additional prospective data ahead of the upcoming panel and therefore we will not be making any additional comments regarding OP-1. I will now turn it over to Dean for more details.
Dean Bergy
Thanks, Katherine. I'll start by discussing the considerable unfavorable impact that foreign currency had on our fourth quarter sales.
The strengthening of the US dollar and the majority of our overseas markets reduced international sales by $68 million in the quarter and reduced the company's overall sales growth by 4.1%. In the fourth quarter, the dollar strengthened approximately 10% against the euro and weakened approximately 15% against yen when compared to prior year rates.
Significant unfavorable currency impacts were also experienced in the UK, Australia and Canada. If currency rates hold near current levels, we expect the impact of foreign currency will decrease the first quarter 2009 sales by about 4.5% to 5.5% when compared to 2008.
Now I'll spend a moment on the impact of price and volume mix on the top line. Selling prices were flat on a worldwide basis in the quarter with domestic prices up slightly and the international prices declining as a result of the April 1st, 2008 government reimbursement cuts in Japan.
Japanese pricing declined 4% in the quarter. Volume mix growth was 8% in the fourth quarter, which had one less selling day compared to the prior year.
Volume mix was generally as expected for orthopedic implant products, but volumes were up considerably for endoscopy and medical business particularly in the US. Overall, our domestic volume mix growth was 7% in the quarter and international volume mix growth came in at 10%.
Now I'll turn to our product category starting with orthopedic implants which represents 59% of our sales. Sales of orthopedic implants grew by 4% in the fourth quarter on a reported basis and 9% on constant currency.
Keep in mind that the fourth quarter includes one less selling day versus 2007, so on a sequential basis, constant currency growth of 9% compared well with 10% growth last quarter, a period that included one additional selling day. We provided the sales growth rates by product line in our press release and I'll reference those as I provide more detail on our product performance.
Starting with hips, they were down 6% in dollars and flat operationally in the fourth quarter. Hips slowed a bit this quarter, but this was expected given one less selling day compared to last year and a tough comparable of 10% US and 8% worldwide constant currency growth in the prior year period.
US hip sales were flat in the fourth quarter, incremental Cormet hip resurfacing sales as well as growth in Restoration Modular Revision products were offset by declines in other hip products. Year-over-year, Trident sales were flat in the quarter compared to declines in pervious quarters.
On a sequential basis, US hip sales were up mid-single digits versus third quarter levels. European constant currency hip sales declined slightly in the quarter.
Accolade, X3 Polyethylene, and Restoration Modular Hip Revision products, each had solid growth which was offset by declines in other hip products. In Japan, hip sales declined at mid single digit levels on an operational basis due to the government price cuts in the impact of one less selling day.
Volume gains were in the low to mid-single digit range led by Exeter. Local currency sales in the remaining international markets increased mid-single digits in the quarter with Pacific posting the best results in these markets.
Now turning to Knees, they grew 9% a dollars and 15% in constant currency in the quarter. Knees had an excellent fourth quarter with our domestic business again leading the way.
US knee sales growth came in at 16%, the 36th consecutive quarter of double digit knee growth domestically. Primary knee has posted low double digit level growth led by Triathlon.
Revision knee growth paced by our Triathlon TS revision product was again extremely strong and we continue to benefit from building sales of the Triathlon PKR product. European knee sales were down slightly operationally, partially as a result of one last selling day.
Growth in Triathlon products was offset by declines in other knee systems. Japan posted mid-single digits operational decline in knees after considering the impact of the price reduction.
Our Pacific knee business posted solid results in the quarter led by Scorpio and Canada and Latin America, and knee sales increase mid-single digits on an operational business with growth led by Triathlon in Canada and Scorpio in Latin America. Turning to trauma that was up 9% in dollars and 12% in local currency this quarter.
Our trauma business had a very solid quarter led by U.S. Domestic sales growth was 18% and would have been 14% of military sales were excluded.
This was an excellent performance when considered against last year's 24% fourth quarter growth. Sales of Gamma3 Hip Fracture, Hoffman II External Fixator, VariAx Distal Radius and Foot Plating System products led our U.S.
trauma grow. International trauma sales were up 8% operationally in the quarter.
Europe posted constant currency growth just shy of double digits. In Japan, local currency trauma sales grew in the mid single-digits specific to where the remaining international trauma business is posting growth above 30% operationally.
On a product line basis, international trauma sales were again paced by growth and upper extremity at foot and ankle products. Spine grew 15% in dollars and 17% on operational basis in the quarter.
Spine franchise had another excellent quarter with U.S. again leading the way and international operational growth reaching double digits for the second straight quarter.
US spine sales grew 20% against an exceedingly difficult prior year comparable of 32% growth. Domestic spine growth was led by interbody and thoracolumbar products.
International spine sales posted operational growth of 10% led by thoracolumbar products. On a geographic basis, Europe grew at mid-teens levels on a constant currency basis while Pacific and Japan grew at mid-single digit levels operationally.
And then last in this product set, our CMF business was up 8% in dollars and 12% in constant currency in the quarter, and CMF had a very solid quarter. Domestic growth of 13% was based by sales of maxillofacial and neuro products and international local currency sales growth came in 11%, but benefited from a very easy prior year comparable.
Now, turning to our MedSurg group. As you know, this represents 41% of our sales comprised of three significant product categories instruments comprising 18% of total company sales, endoscopy 14% and medical 9% to come up with that total of 41%.
As has been well-publicized by now, our MedSurg group had a mixed quarter. On the plus side instruments had an excellent quarter in the U.S.
and endoscopy and medical did well internationally. However, these performances could not offset the impact that US hospital belt-tightening had on our domestic endoscopy and medical franchises as well as softer instruments quarter outside the US MedSurg sales growth was 3% for the quarter on a reported basis and 6% on an operational basis.
And, then touching briefly on the product categories here. Sales for our instruments product line were up 9% in the quarter on a reported basis and 13%, operationally.
Instruments had a very strong quarter in the US with sales up 18%. International sales growth was softer as a result of the ramp-up of shipments of our System 6 Heavy-Duty Power Tools to overseas markets following a late third quarter voluntary recall of that product.
Endoscopy's fourth quarter sales were down 5% in US dollars and 2% in constant currency. Endoscopy was hurt by both the significant falloff in capital demand and the state of its own product cycle with the new 1288 HD camera and related video products launching in recent weeks.
Domestic sales declined 7% with video down significantly. International sales with 15% operational growth did not experience the same slowdown of being on a smaller base.
And then our medical business grew 4% in the quarter as reported and 7% in constant currency. Medical declined 2% in the US, but had an excellent quarter overseas.
Domestic sales saw a modest growth in the EMS products offset by declining sales. And the international business for medical grew over 50% operationally on a small base.
Now I'll turn to the remainder of the income statement beginning with gross margins. Fourth quarter gross margins declined 80 basis points compared to 2007, primarily as a result of the costs for internal and external resources working at our compliance initiatives.
Margins were also negatively impacted by higher freight costs. Research and development spending was down 2% in the quarter, but was up 8% on a sequential basis to reach 5.8% of sales in the quarter, a high water mark for the year, and in line with our budget on a gross spending basis.
Selling, general and administrative costs, decreased 2% in the quarter, primarily as a result of reduced discretionary spending partially offset by increases in sales-related costs. Selling costs include compensation and instrument amortization costs, and again grew below the rate of sales growth due to slowing instrument amortization.
During the fourth quarter, we decided to simplify the structure of our Japanese distribution business and to substantially reduce development efforts associated with Sightline Product Technologies acquired in 2006. As a result, we recorded a $35 million pre-tax restructuring charge in the quarter, which reduced net earnings by $22 million or $0.05 a share.
Excluding the impact of this restructuring charge, adjusted operating income increased 12% in the fourth quarter and adjusted operating margins increased 23.6% of sales. I'll provide a quick breakdown of other income and expense for the quarter that was made up of investment income of $19.9 million, offset by interest expense of $8.3 million, and a foreign currency transaction loss of $1.8 million to get to total other income of $9.8 million in the quarter.
The company's effective income tax rate was 26.9% for the fourth quarter 2008 and 27.4% for the year in line with the rates of the third quarter. With the restructuring charges excluded, the effective income tax for the fourth quarter was 27.9% and the annual rate was 27.6%.
As indicated in our press release, we initiated and completed the previously announced share repurchase programs. In total, we repurchased 17.4 million shares for $1 billion.
And then turning to the balance sheet. Our balance sheet continues to be very strong and I'll briefly discuss certain key asset management areas.
Accounts receivable days ended the year at 59 days. This represents an increase of three days compared to the prior year.
This metric has been 59 or 60 days all year, and we believe this represents excellent performance given our geographic footprint. Inventory days finished 2008 at 155 days, down nine days sequentially were up 18 days versus the prior year.
A number of factors including our compliance initiatives and the fourth quarter sales slowdown have left this metric a bit higher than we would like. And then last I'll end with some brief commentary on cash flow.
All in, we had another very strong cash flow year, cash flow from operations for the year grow 14% to 1.176 billion and free cash flow was up 22% from 841 million to 1.29 billion slightly above the amount used to repurchase shares during the year. With that I'll turn it back over to Steve.
Steve MacMillan
Thanks, Dean. Before we open it up for q-and-a, we'll touch here on our outlook.
As we look at 2009, we are facing both challenges as well as opportunities. We are assuming hospital capital budget pressures will continue and foreign currency remains volatile clearly creating more uncertainty than at any time in recent memory.
In addition, the elective procedures may see some slowdown and will continue and make ongoing investment in compliance. We know many are wondering how certain we can be in developing our plans and guidance for the year.
And the truth is, it is hard to have a high degree of conviction given the environment. Against this uncertain backdrop, we are focused on what we can control, especially our costs.
On the positive side, we continue to see strong momentum in many of our businesses as knees, spine, trauma as well as our CMF implant businesses are well poised to maintain their above market growth. And although MedSurg will see pressure in 2009, we remain confident in the strength of the core portfolio products as well as opportunities to leverage these franchises outside the US.
Additionally, our hip franchise after underperforming throughout 2008 is set to deliver improved growth, helped by new products while our endoscopy franchise is entering a major new product cycle. We are also extremely focused as an organization on leveraging our P&L via cost controls.
Combined, all of these factors were key considerations as we developed our budget for 2009. As stated, we expect to deliver 6% to 9% constant currency sales growth in 2009 and 10% to 14% EPS gains to 312 to 322 per share as a range.
Speaking candidly, we've had a number of comments from investors over the past two weeks who feel we are overly optimistic in establishing these goals. Maybe so, but those of you who know us well understand that our DNA is wired to set the bar high and achieve results that do stand out over time.
So once again, we are setting aggressive goals, but we will be closely tracking the environment and our actions to deliver against these goals. We're not simply going to take a pass on 2009, because it's a challenging time.
It's important to recognize that results will be stronger in the second half, as the hospital capital environment, the impact of currency, our investment and compliance, and the lower investment returns are expected to limit per-share earnings growth in the first two quarters to the mid-single digit range. Despite the currently challenging and uncertain economic environment, we believe we are well positioned to deliver meaningful growth in 2009 and beyond.
As we move past 2009, we'll continue to make significant investments in compliance, but we'll benefit from P&L leverage and decreasing one-time costs. We also expect to begin to realize the benefit from efficiency initiatives, including vendor consolidation, streamlining back office functions, and procurement.
And although FX is always an unknown, we would expect that the swings in currency will be more in line with historic norms versus what we have experienced in recent months, and for hospital capital spending to eventually normalize leading to hopefully even stronger results. We'll now open it up for Q&A.
We'll hand it back to you Amity.
Operator
(Operator Instructions). Your first question comes from the line of Bob Hopkins of Banc of America Securities.
Please proceed.
Bob Hopkins - Banc of America Securities
Hi, thanks. Can you hear me okay?
Stephen MacMillan
Yes, Bob.
Bob Hopkins - Banc of America Securities
Oh, great. Good afternoon.
First, just on that comment that you made around guidance and the philosophy in DNA of Stryker, I'm just curious, couldn't you have higher goals internally than you set guidance - then the guidance, that you give to Wall Street?
Stephen MacMillan
You know what, Bob. We've always tried to have internal and external goals that align.
And frankly a lot it comes down too, we set our sales targets for our aggressive targets for our people, and we want to maintain ourselves to the same standards. Okay, we like having the same goals internally and externally.
Bob Hopkins - Banc of America Securities
Okay. Yes, just of sort of an IR question there.
But...
Dean Bergy
We comprised to be more conservative but, just not us.
Bob Hopkins - Banc of America Securities
So if I look at the guidance that you gave for '09, it looks like you're assuming mid-to-high single-digit growth for MedSurg and number one, is that right? And number two, since you gave that guidance, maybe roughly three, or four weeks ago, now the trends you are seeing at hospitals sort of stayed the same or gotten little better or gotten little worse?
Stephen MacMillan
Say overall, we haven't seen any real change in the trends over just the last few weeks. We are obviously staying very close to them and I think ultimately, we'll know a lot more I think after the first quarter comes through.
Bob Hopkins - Banc of America Securities
Am I right about what you're assuming for MedSurg somewhere in that mid to high-single digit range for that overall MedSurg business?
Stephen MacMillan
Yeah. As you know we don't give too much specific guidance to that effect, but I think that's in the range.
Katherine Owen
And, Bob, again this is a follow-up, keep in mind, given that the year is backend loaded, part of that is going to be a more of a MedSurg phenomenon?
Operator
Your next question comes from the line of Mike Weinstein with JPMorgan. Please proceed.
Mike Weinstein - JPMorgan
Thank you. I have ten questions, I'll try and narrow it down here.
First off, thank you for the candid comments, Steve, I think they were all appreciated. Let me do follow up that one, on some of the questions that Bob was asking, and I think we are interested in the way the macro environment is evolving and impacting businesses.
Your orthopedic business held up very well, orthopedic industry held up very well, and your knee business held up very well in the fourth quarter. Are we seeing any drop off procedure volumes in your mind in the first quarter?
It's obviously just a few weeks into it, but any thoughts that maybe procedures were pulled into the fourth quarter, people were trying to use up their FSAs and trying to take advantage of their deductibles they had worked through them already?
Stephen MacMillan
You know it looks over the last few years like that's increasingly happened and I know you've been looking at the seasonality of that. We're kind of assuming some of that, but again it is pretty early in the quarter.
I think overall, for all the talk that's out there, about procedural slowdown and you certainly see some pockets, I don't think we see anything dropping off the face of the earth here.
Katherine Owen
I would just add -- there is kind of two things going on. The slowdown on the capital spending cycle is very real and we've got a lot of data points obviously to bake that into our expectations.
The elective procedures side is more something that we've considered in our budgeting as a possibility as opposed to anything that's showing up in any clear way right now that you could draw any trend. So far, Q4 was very much in line with historic norms recognizing a little bit tougher comps and one less selling day.
Mike Weinstein - JPMorgan
And then, let me ask two other questions. One, Katherine, you described the compliance initiative as being in your of two of a three-year initiative, and I don't think that I've heard you guys describe it that way before where this is a three-year playout.
And we're now entering year two of it. So, I want to make sure we're thinking about the spend levels as we go from 2009 to 2010 correctly.
Obviously it's still early in that process, and I want to make sure we are thinking about that [play]. And then second, I want to come back to the question of use of cash.
You said you guys bought back a $1 billion worth of stock, which is obviously a very sizable amount. We talk about use of cash from here.
Do you have an authorization in place to repurchase additional stock if you choose to do so? Thanks.
Katherine Owen
That was sort of two questions but--
Mike Weinstein - JPMorgan
That was more than two. I tried.
Katherine Owen
Yeah. I'll give you that.
I guess a couple of points. The first one, we did talk a couple of weeks ago about the compliance program that year two was really or 2009 with year two of a three-year cycle, or of a three year process.
It's going to go on beyond three years, but the primary kind of key investment, the major investments we're making across the organization we have laid out in a three-year plan, and so year two was really the peak investment year spend of that three-year. We're having more costs next year, but in terms of incremental investment, the hope would be they would not be above 2009 levels.
And then, beyond that we'll have ongoing investments with these kind of one-time costs that are captured in this three-year time frame. That's what we're talking about in a two out of three-year initiative.
Dean Bergy
Yeah. On a cash Mike, we do not have an additional authorization in place.
Certainly, it's something that could be used. Our preferred use of cash would continue to be acquisitions first still and obviously we've got a number of things that we could potentially look at there.
Mike Weinstein - JPMorgan
Perfect. Thank you, guys.
Stephen MacMillan
Thanks, Mike.
Operator
Your next question comes from the line of Raj Denhoy from Thomas Weisel Partners. Please proceed.
Stephen MacMillan
Hello, Raj?
Raj Denhoy - Thomas Weisel Partners
Sorry about that had the phone on mute. I was curious, if I could ask little about the Department of Justice.
My understanding is the monitoring initiatives are going to end here at the end of the first quarter or early in the second quarter. How should we think about that?
I mean, are you expecting any major change in anything should that [monitoring] come to a close and is there also a possibility that it won't end then it might get extended further?
Stephen MacMillan
Well, I don't think we have much evidence that would suggest it's going to continue on, but I think there has been a fundamental shift in this industry. And I would expect not significant changes afterwards.
I know there's some investors out there that think okay, all of a sudden it's going to be the wild west come April 1st. I think, we've all learned that would not behoove us to us be going and changing and I think most of the companies have really put in much more rigorous systems in terms of needs assessments and everything else, and that there probably won't be much change.
Raj Denhoy - Thomas Weisel Partners
Okay. And then, if I could just ask one on the SG&A.
You know the margin in the quarter was quite good. I think, it's the best we've seen for a couple of years and I think you've in the past talked about there being a lot more margin there still in it, 38.2%, I mean, are we looking at that number declining significantly again here in '09 or just sort of thoughts on where that number could actually get to overtime?
Stephen MacMillan
Sure. We probably don't [feeling this] little bit target to going down.
I would say the way we're thinking about it right now is in the good times when we were really generating clearly solid double-digit growth, we kept saying, hey, we maybe making additional investments in additional sales force expansion, other things. I would say what you saw in the fourth quarter is we got wind particularly that last week of October when we saw orders not typically come in.
We reined things in pretty tightly. And I think we've got enough resources on the ground that continue to drive us here for final, but our typical headcount expansions and some of that stuff, we really reined in.
So I think the fourth quarter is probably a signal of more things to come here in the first few quarters until things pick back up.
Dean Bergy
If I could just add to that briefly, I think obviously, we said there could continue to be some gross margin pressure. So, I think it's fair to say for the year that you could see SG&A still down.
We still got some room there, but as Steve said I think we also want to be sensitive to where the business is. And keep in mind, that on a quarterly basis, usually the first quarter is a higher SG&A quarter, and although I would expect it to be down year-over-year, I would not use the fourth quarter as a proxy for what you're going to see in the first quarter in terms of percentage of sales spending.
Operator
Your next question comes from the line of David Roman with Morgan Stanley. Please proceed.
David Roman - Morgan Stanley
Hi, good evening, everyone. And thank you for taking the question.
Just Steve, if you could cross the different businesses, there were several areas where you posted growth way above market rate. Can you maybe talk a little bit about what's happening in either the knee market or instruments market of what's driving the outside growth?
Is it volume, mix, share gain, et cetera?
Stephen MacMillan
Sure. I think within knees, it's all of the above.
Clearly, our Triathlon knee has by all standards turned out to be a great, great knee. And we continue to gain new customers on that even well into what the fourth year of the product life cycle and the accolades on that continue to be very strong.
So I think we're feeling great about that. I think our instruments business continues to bring new products out and expand essentially our share of the operating room.
I think it's why we continue to be underlying, you know have a lot of bullish feelings despite the current challenges that there is still so much opportunity challenges and so much underlying momentum in a number of our businesses that even if the markets slow down a few points, we should still be able to post have decent growth. It won't be up to our historic norms, but it will still be solid by probably most people's measures.
David Roman - Morgan Stanley
Okay. Then on the $60 million to $90 million increment or spending for next year or this year on quality, could you give us some sense on how that flows through the P&L, maybe, some trajectory on gross margins and SG&A for next year?
Stephen MacMillan
Sure. Dean, you want to take that?
Dean Bergy
Sure. Yeah.
The majority of those costs will go through the cost of sales line. So again, as I said, I think that on margins, we would expect them to be flattish to down slightly as a percentage of sales for the year, although obviously for the first quarter, they're going to be down from what was a very, very strong first quarter in gross margin in 2008.
In SG&A, as I said, I think we do have some room to continue to see that come down as a percentage of sales, maybe in the 50 to 100 basis point range for the year.
Operator
Again, we ask that participants limit their questions to one question and one follow-up. Your next question comes from the line of Bruce Nudell of UBS Securities.
Please proceed.
Bruce Nudell - UBS Securities
Thanks. Steve or Dean, could you speak just generally to the differential performance in the MedSurg categories, is it just the size of the CapEx expenditures the hospitals have to make that kind of explains the differential performance?
And looking out into '09, because this is a tough to model space, could you just kind of at least qualitatively contrast what we've seen this quarter, at least relatively amongst the groups, will that extend in the MedSurg groups? Will that extend to 2009?
Katherine Owen
I'll give a couple of points, Bruce. You are correct in that.
In certain of the businesses medical being the most and instruments being the least on more capital intensive then other would be overall split still being in that kind of 60/40 range. So that certainly has an impact.
I'd also layer on top of that though, endoscopy, which actually saw the greatest pressure was also coming towards the tail end of product life cycle. And as we've showed before that you see most of the volatility, endoscopy's growth has historically been tied less to capital budget more so right now given the environment that we're in, but it's very much impacted by new product launches.
And when we launch our major new camera like we just did a few weeks ago, that has a bigger impact traditionally. So, it really had two factors weighing on it, one throughout most of the year and then certainly in the fourth quarter compounded by capital budget.
Bruce Nudell - UBS Securities
But specifically looking at endoscopy, which was down 2% operationally and patient handling which was 7%, I mean, are those kind of representative of kind of the run rates we might see in this extraordinary period or would you expect improvement endoscopy at least, towards mid-single digits or even higher?
Katherine Owen
Yeah. We're not going to get into line item detail in terms of the projection for the full year.
We did made comments, that you should expect [orthoto] be stronger, obviously than MedSurg. MedSurg will be more back-end loaded.
We do expect growth within the MedSurg business throughout the year. I wouldn't necessarily read too much into the fourth quarter.
There's difference quarter-to-quarter in terms of yearend capital budgets seasonality, timing of product cycles, year-over-year comparisons all of which will have an impact on the growth rate. We would expect endoscopy to be more back-end loaded, partly because of the capital budget but also because of the comp that we'll have in the fourth quarter of 2009 and the gradual benefit it will realize from the product cycle launch with the endoscopy, the 1288 camera and the related products.
But beyond that we're not going to get into too much granularity. I think the good news is we're able to track what's going on with capital budgets a lot better.
We've got a lot more information from our key customers. We get that on a weekly basis now.
Things have not continued to deteriorate rapidly, but it's obviously not at a point where capital budgets are improving. So that's the environment we're in, but I would not necessarily extrapolate Q4 rates into Q1.
Operator
Your next question comes from the line of Ed Shenkan with Needham & Company. Please proceed.
Ed Shenkan - Needham & Company
Thank you. I just wanted to ask you your comment that you said elective procedures may see a slowdown, what areas might you expect to see the slowdown first?
Would it be domestically, internationally, would it be hips, knees, or spine?
Katherine Owen
The short answer is don't know. We're talking about something we're not sure is going to happen.
I don't think there is a big difference between hip and knee procedures in terms if you're going to make a decision to delay a procedure. I am not sure it's different whether it's a hip or knee or spine, they're all elective to a degree.
But the reality is patients with this kind of debilitating pain really have to have the procedure done. So could we see a quarter or two, where there is a slowdown in any one of those three buckets because people are concerned about co-pays or taking time off work is entirely possible.
We think it's prudent to assume that in some of our budgeting, which is why we did come up with the range. And you can make assumptions as to what that the lower end of that sales range.
The U.S. versus overseas, there are some differences.
Obviously, nationalized healthcare and what some of the spending will do. I think the bigger issue is probably domestic, but I wouldn't assume.
It's completely different. Beyond that, it's hard to give you granularity as to which procedure may see a slowdown before a different one.
Ed Shenkan - Needham & Company
Does the average age for the procedures, do you think that would make the impact compared to if it's a Medicare procedure maybe it's less at risk?
Katherine Owen
It really depends. If you are a Medicare patient, you are going to have anything from nothing to a couple thousand dollars of out-of-pocket expenses depending on what type of additional coverage Medigap coverage you have or whether or not you've already had a procedure done through the year, that's going to eat up that.
On the private side, which is probably another big chunk, obviously not the majority, it's really going to depend whether your inside, your provider network outside of it, the magnitude of co-pays vary dramatically. Do you opt to have this procedure done if you are one of the two million people out of work right now before your COBRA goes away?
There's a lot of compounding factors, right now, that I don't think you can make a big determination whether or not if the slowdown happens, if it will be Medicare or non-Medicare specific.
Ed Shenkan - Needham & Company
And last, is it then in your guidance that there would be a slowdown or is that not part of the guidance?
Katherine Owen
What we've tried to reflect in the 6% to 9% revenue range is assumptions at the low end, which obviously assumes a tougher capital environment and have taken some appropriate cautious guidance around elected procedures and then there is the high end of the range. We've made assumptions into both that's captured in that 6% to 9%.
Stephen MacMillan
The simple perspective here is look we just grew 11% local currency in 2008. We're saying the low end is 6%, almost half that in 2009.
So, hopefully, that should frame in. Our 6% to 9%, remember, is a significant haircut from what we've been doing over the last few years.
The additional, you know, uncertainty, there is uncertainty. We can't tell you exactly by quarter which business is going to do exactly what.
And by the way, even in our best years, you know, remember when we go back and look at our final results for a year, it doesn't exactly mimic by quarter what we predicted for every business, but collectively our diverse footprint, always seems to come through. Some of the businesses come in higher, some are little lower.
And again, I think, we're trying to manage it as we can here.
Operator
Your next question comes from the line Joanne Wuensch with BMO Capital. Please proceed.
Joanne Wuensch - BMO Capital
Thank you. Could you tell us what you are assuming for foreign exchange headwind in 2009?
Stephen MacMillan
It's going to be all over the place.
Joanne Wuensch - BMO Capital
I mean in your guidance sir, on the six to nine.
Dean Bergy
It's in the press release.
Katherine Owen
69% Joanne is constant currency.
Dean Bergy
That's constant currency, so--
Joanne Wuensch - BMO Capital
Understood. But I mean, assuming 500 basis points of FX, headwind is 300 basis points that's really what I am asking?
Dean Bergy
Yes. There's an unfavorable impact of 3.5% to 4.5% that we would assume would be, you know a headwind, given the current rates and again that's a reduction of that 6% to 9% constant currency growth.
Joanne Wuensch - BMO Capital
Okay. When -- take a look at your spine business, it's growing above the market growth rate?
Could you give us an idea of what is driving that growth and can you also give us an update on artificial disks. Thank you.
Stephen MacMillan
What's driving it is great products and great sales people. We think, we've quietly built an incredibly strong sales organization and we've fed them a lot of new product innovations over the last few years.
We really rounded out the bag. But it's a dynamic team, just a dynamic team that we have there with a lot of momentum and we expect that to continue.
On the artificial disks, we're essentially waiting for the -- I'm sorry, for the FlexiCore we're in the process. We are hopefully having that, on the market potentially later this year.
It's in with FDA going through the some of the inspections and some of the other stuff, and then CerviCore I think we are still thinking as later on in 2010.
Operator
Your next question comes from the line of Tao Levy with Deutsche Bank. Please proceed.
Tao Levy - Deutsche Bank
Hi, Good afternoon.
Stephen MacMillan
Hi, Tao.
Tao Levy - Deutsche Bank
Hey. A quick question on the CapEx changes that you are seeing, so when you have the dialogue with the hospitals, what are they saying is causing them to delay the purchase and sort of what are they waiting to see to reconnect and sort of purchase a new suite or some new products on the CapEx side?
Stephen MacMillan
It varies all over the place. Remind you, there were some hospitals that had their bond offerings to go through and frankly we are in pretty good shape from a capital standpoint.
Our job is to find more of those. There are other ones that what's really happening in a lot of cases is, it really in that October timeframe, a lot of the CEOs -- we're looking around whether it was their endowments or their capital budgets in general and just starting to put in either arbitrary cuts or arbitrary holes and it literally is all over the map.
We're getting weekly updates from our teams in the field particularly in the US and they just are all over the place in terms of how long they expect them to continue. What levels they are at in terms of how far down they are going.
And, I think just in general we are assuming there's going to be less capital spent certainly in 2009 than what people would have been planning six months ago. Having said that, there's still going to be money spent and I think our job is, if you look, I think six out of our eight business is probably seven out of our eight businesses, we've been growing at faster than the market last year.
Our charge to our teams is there still going to be money spent. We've got to get more than our fair share going forward.
Tao Levy - Deutsche Bank
But no sort of single event or anything we're kind of waiting for whether it's anything in government side?
Stephen MacMillan
You know I think in general, I think too many people are looking for single events. I think it's going to ultimately let's face it housing come back, but jobs are going continue to get worse.
It's a hard time to plan. I know we'd love to give you more definitive answers on a lot of this stuff.
Anybody that's giving you definitive answers, I don't think, knows what they're talking about.
Operator
Your next question comes from the line of Michael Matson with Wachovia Capital Markets. Please proceed.
Michael Matson - Wachovia Capital Markets
Hi. I had a yet another question on the hip business.
Steve, I think you mentioned that you're launching some new products there. I was wondering if you could tell us what those products are and if not, I guess one of them that we're aware of is the tritanium cups.
Just wondering on the timing of that launch, and if there's any additional instruments that will have to be placed in the field? In other words, how quickly can that really ramp up?
Stephen MacMillan
Tritanium is really ramping up now. That is what we're talking about particularly, and that was a fourth quarter launch rolling out and starting to get some traction.
I would also tell you, I think our sales force has been so focused on knees because we've been having so much success there, that I think part of our hip business has lagged a little bit from that. But I think tritanium will get folks talking about hips again a little bit.
It still not -- we're not going to generate the kind of growth that we'll have on knees this year. But it should certainly start to pick up.
Michael Matson - Wachovia Capital Markets
Okay. And then just with regards to the guidance range for EPS, how much would currency have to move before it would push you out of that range?
Stephen MacMillan
[Probably] Dean -- beyond what we put in the release, largely I would you say?
Dean Bergy
Yeah I mean, obviously, we gauged our guidance around the FX numbers that we've put in the release, and so I think you can naturally assume that movements outside of that could potentially impact but there's a lot of, you know there's a lot of factors that go into that. Right now, we've assumed that the negative impact on our FX for the full year will be in the kind of the $0.10 to $0.15 range generally.
Katherine Owen
The only thing I'd add onto that is I wouldn't make any huge conclusions if currency rates move demonstrably outside that range if that happens, because this is a big company with a lot of items that are fluctuating whether it's commodity prices or legal costs or whatever it is. So these things can't really be isolated and assume that movement in isolation can -- you could draw down so that means extra earnings.
Dean Bergy
Yeah. And I think, the other thing that's fair to say in that regard is there is a lot of currencies that are moving here.
I referenced, you know, the British pound, the Australian dollar, the Canadian dollars are all currencies that are also moving around here, and when you look at all the cross currency impacts, it's actually very complex in trying to put your arms around it.
Michael Matson - Wachovia Capital Markets
All right. Appreciate the clarification.
Thanks.
Stephen MacMillan
Thanks.
Operator
Your next question comes from the line of Matt Miksic with Piper Jaffray. Please proceed.
Matt Miksic - Piper Jaffray
Hi, everybody. Thanks for taking the questions.
Stephen MacMillan
Hi, Matt.
Matt Miksic - Piper Jaffray
I have two and I do have a clarification, I'd love to try to squeeze in here, Dean, on one of your comments during the call. The first going back to the top, Steve, you had talked about guidance and having some conversations with some folks on the street who don't think that you're going to be able to hit your guidance or feel that you maybe being overly optimistic.
Can you talk a little bit about, you know, whether you being optimistic that the street is not you think or investors aren't aware, where do you think that the strength is going to be potentially, areas of upside that maybe we're not understanding?
Dean Bergy
Sure. I think to me the big picture comment is people saying, everybody is writing off 2009, why don't you guys do the same?
And again, it comes back to the fact, I think we've got a lot of positive momentum and the biggest piece is I'll give you this. Think about our MedSurg businesses.
Yes we're going to hit some capital hiccups here in the United States. We've been making efforts to expand that business outside the United States.
And frankly, those businesses are still roughly three-quarters of those businesses today are in the US. We have very low market shares outside the US.
You know, now is the year that we hope that some of what we've been doing over the last couple of years will help us to effectively cushion some of the downside. And I think you saw that in the fourth quarter when we put out our, I think when we put out in mid December our update on the numbers for the fourth quarter.
I think everybody thought MedSurg was going fall completely apart, and if you looked at it, yeah, we had two businesses that were negative in the US in the quarter, but they both had double-digit growth outside the US. So it gets back to in any given quarter, we always have a few things that surprise us on the upside, either geographically or by franchise and invariably we have a few things that disappoint us.
But collectively, the numbers still seem to come through pretty well that we're growing at or above our markets in virtually every area.
Matt Miksic - Piper Jaffray
Okay. That's helpful.
Second question, and again, I do have one clarification I'd like to sneak in. The second question is that on this hospital spending front, Katherine, you mentioned a lot of data points, a lot of people have recognized there's pressure there.
I'm trying to understand and it will be helpful if you could shed some light on, to what degree is, the certain amount of belt tightening and cash conservation that's going on in hospitals. But then, there's also this element of just new hospital construction that has been put on hold or stopped or significantly curtailed.
And so, I'd love to understand to what degree those drive your business and then also to what degree maybe they are a factor going forward O.U.S. as well?
Kurt Hartman
Matt this is Kurt Hartman. Let me try and take a stab of that question just stepping out of an operating business.
Certainly at the street level, we are focused on existing hospital as well as new construction opportunities and given the current environment, some of those new construction opportunities have obviously slowing down. But you have to keep in mind that the procedure volume that's out there that creates the wear and tear and equipment has not fundamentally disappeared.
It may slow slightly, depending on elective procedure trends, but that use of equipment, that constant cycling of equipment does place an emphasis on new equipment replacement and purchases and certainly we're going to pursue that as aggressively as possible, even if new constructions segments of the market do slowdown
Matt Miksic - Piper Jaffray
Okay. And on the O.U.S.
side of this, at this point right now, I recognize you're building out that side of your business particularly, in beds for example. Is that at risk down the road?
Are we concerned at all that US is a capital spending problem now and that may go overseas from the next six to twelve months?
Kurt Hartman
I don't think we would say it couldn't go overseas. I think what we would say based on Steve's comment was, our percentage of MedSurg's outside the US is fairly small at this time.
So any slowdown there should not have an overly meaningful impact on our results. And frankly, we see more opportunity there because we have so much opportunity to go capture market share.
Matt Miksic - Piper Jaffray
And may be penetration is in your favor there. And then, the last point just to clarify, Dean, you made a comment during your talking through the P&L about slowing instrument amortization expense, sort of easing on the SG&A line.
Could you just explain that?
Dean Bergy
Yeah. You know, the instruments are basically -- you know, the instruments that we buy and provide to generally the hospitals to support orthopedic implant procedures, and, you know, the timing of our spend there tends to revolve around not only the cost of the instruments but also the timing of launches of products.
And you know, just given where we've been, when we had the Triathlon launch, and we had a significant [vols] of instruments that went into the field and that was a huge launch. In relative terms, we've been able to control the level of instruments that have went into the field much at a slower pace in the last couple of years and therefore that rate of amortization on that number started to slowdown.
Matt Miksic - Piper Jaffray
Great.
Operator
The next question comes from the line of Rick Wise with Leerink Swann. Please proceed.
Rick Wise
Good afternoon, everybody. A big picture question then an operating question.
On the acquisition front, Steve, should we think given the greater availability and possibly more attractive pricing that acquisitions or an acquisition is more likely this year or is it less likely given all the challenges you're facing in preferring to focus internally?
Leerink Swann
Good afternoon, everybody. A big picture question then an operating question.
On the acquisition front, Steve, should we think given the greater availability and possibly more attractive pricing that acquisitions or an acquisition is more likely this year or is it less likely given all the challenges you're facing in preferring to focus internally?
Stephen MacMillan
Probably more likely, Rick but because we like reevaluations are coming. Having said that, we continue to be in a real good position of strength with our underlying business, so we're not going to race out and just jump in to something.
But, we like where the valuations are moving frankly, like having the cash that we have right now.
Rick Wise
And on the, back to MedSurg, on the O.U.S. instrument front, I'm not sure, I picked up if you mentioned, I apologize if you did.
O.U.S. was down, I think 8% -- I forget, reported or operationally.
Just can you remind us, what's going on there and what and when you might turn that around?
Leerink Swann
And on the, back to MedSurg, on the O.U.S. instrument front, I'm not sure, I picked up if you mentioned, I apologize if you did.
O.U.S. was down, I think 8% -- I forget, reported or operationally.
Just can you remind us, what's going on there and what and when you might turn that around?
Stephen MacMillan
Yeah. I think it's a one-quarter blip.
It looks like our European business had a great fourth quarter '07. And I think they fell asleep at the end of fourth quarter of '08.
And we also did have as I think Dean mentioned, a recall on System 6 that affected us at the start of the quarter. So we didn't quite make that back up.
But we're back in business there. So nothing I think to be too concerned about.
Rick Wise
Some more normal, back to more normal performance?
Leerink Swann
Some more normal, back to more normal performance?
Stephen MacMillan
Should be, yes. Yeah.
Rick Wise
All right. Thank you.
Leerink Swann
All right. Thank you.
Stephen MacMillan
Thanks, Rick.
Operator
Your next question comes from the line of Jeff Johnson with Robert Baird. Please proceed.
Jeff Johnson - Robert Baird
Thank you. Good evening.
Steve or Dean, I guess, wondering if you could talk qualitatively just on flexibility on the expense side of your model. How low could constant currency growth go before you'd really start sweating out maybe the lower end of your EPS guidance and I don't expect a direct answer there, but maybe just qualitatively if you could frame that for us?
Stephen MacMillan
I'll let Dean handle that one. I sweat over everything.
Dean Bergy
Well, obviously I mean we've given you ranges and we feel comfortable with those when we know this is probably as fluid a market as we've ever been in. And we're going to have to manage our business, but as Steve said throughout his comments, we take our objectives and goals very, very seriously in this company and I think you should assume that's going to be the case and obviously going to be managing the business as we go through the year.
Jeff Johnson - Robert Baird
Fair enough
Stephen MacMillan
We're more focused on cost than we've ever been and yet it's a fine line, because we still have a lot of growth. We don't want to choke off additional growth, so what we're trying to do is stay very close to our key leaders around the company in terms of managing our costs, but also investing where we still have the opportunities to grow, but really paying much closer attention to details right now.
Jeff Johnson - Robert Baird
Sure, understood, Steve. I guess my question is more, there -- is there anything in the bag where we could cut this back if we absolutely have to, but right now we're not going to necessarily unless we really need a few more pennies to bottom line something like that?
Katherine Owen
I would say from a big pictures perspective, no. If the environment continues to worsen dramatically, I think you'll see a whole host of companies re-evaluating priorities and costs.
Right now, we feel good that based on everything we know, recognizing there's uncertainty, the 6% to 9% range [marries up] well with 312 to the 322 that we've outlined.
Jeff Johnson - Robert Baird
Fair enough. And then just a clarification I guess, Dean, shipping rates, commodity costs coming down in that, is that more of a backend of the year type benefit that we might start to expect to see a little bit?
Dean Bergy
It's certainly possible. Freight rates as I mentioned in my overall comments stayed pretty high in the fourth quarter and we certainly hope that, you know, shipping costs and commodity are things that we can start to see squeeze down in appropriate reaction as we go throughout the year, but probably not necessarily starting the year.
There are people tend to try to hold on to increases that they've gotten there and it's our job to work them down.
Jeff Johnson - Robert Baird
Understood. Thanks, guys.
Operator
Your next question comes from the line of Doug Schenkel, Cowen and Company. Please proceed.
Doug Schenkel - Cowen and Company
Hi, good afternoon. It looks like things like the Sunshine Act and some other government initiatives to increase price transparency and in general control healthcare costs are may be gaining a little bit more momentum heading into the year.
There's also been some new data points albeit somewhat anecdotal suggesting that hospital administrators are gaining some traction in managing implant and vendor selection. I was just curious, if you have any thoughts on any of these dynamics and specifically what pricing assumptions for Recon are incorporated into your guidance?
Stephen MacMillan
Doug, we're facing these pressures all the time. They've been building over the last few years.
We continue to deal with them on a daily basis as we go through things. The Sunshine Act, you know, remember is focused more on physician payment, disclosure of physician payment as opposed to pricing.
Now there is obviously a link back. We certainly see the hospital's more focused here.
We continue to try to bring value to the game and as we, the last couple of years we have effectively had zero percent price increase around the world, see that continuing to be pressured.
Doug Schenkel - Cowen and Company
Okay. And one, I guess a second question.
And it may seem a bit silly given what we know is going on in terms of the hospital capital spending environment, but you did mention that endoscopy also struggled in part in the fourth quarter because of maybe anticipation of the launch of the new product line. If so, is there any chance that there may be at least a smidge or pent up demand for some of those products heading into the first quarter?
Stephen MacMillan
It's a very good question. There's probably a smidge, and I think in any other year, I would tell you any other year with the product line up, we just launched in our Endoscopy division our endo business would grow 20% this year.
But, there is such wide variation right now, that even if there is a little pent up, it's, I think we're being cautious in assuming it's going to be really slow coming out of the gates.
Doug Schenkel - Cowen and Company
Okay, thanks for taking the questions.
Stephen MacMillan
Thanks.
Operator
Your next question comes from the line of Kristen Stewart of Credit Suisse. Please proceed.
Kristen Stewart - Credit Suisse
Hi, good after. Thanks for taking the question.
I just want to clarify on the warning letters, did you say that you expect to have them resolved in 2009 or just your facilities ready for inspection in 2009.
Katherine Owen
The goal would be to have them resolved in 2009.
Kristen Stewart - Credit Suisse
And then a just kind of more big picture. I think your 2010 and beyond goals that you outlined a couple weeks ago were for about 10% constant currency and 15% plus EPS growth.
Do you feel like you have the right mix of business right now? How important will acquisitions be to furthering those goals?
And I guess what gives you confidence that we're seeing in the market with the pressures from CapEx will just be more of a one-year sort of phenomenon?
Stephen MacMillan
Sure, I think we do feel good about our mix of businesses today that we would be able to deliver that in more normative times. The hospital CapEx stuff, it's going to come back.
The other part is, even with hospital capital expenditures slower, there's still a lot of spending going into healthcare. And, we still have very low market shares.
There is still significant opportunities for us to frankly take share in every market we compete in. And I think that's what has us feel good.
Having said that to your acquisition question, Kristen, I think we'll continue to look for additional businesses, particularly ones that are in our real house and continue to try to build out our platform and probably broaden it in years ahead.
Kristen Stewart - Credit Suisse
And I guess, just on the acquisition front, are you still looking more on the smaller side or would you be willing to do a bigger deal that establishes some sort of new franchise. And dental was one area in the past, when you typically look at acquisitions, are you looking on several years to maybe to recover that sort of dynamics?
Stephen MacMillan
We'd consider some things that could bring new platforms to us, which would be bigger by, you know, some standards but we're not going to do any absolute game changer that puts us into a heavy debt position or anything like that.
Kristen Stewart - Credit Suisse
And your tolerance for the dilution in the past, I think you characterized that as reasonably low or how do you think about that?
Stephen MacMillan
Again, ultimately it's going come down return on capital and how we think about staff. Certainly a year one dilution, we'd be willing to do if it's the right thing and probably even in the year two if it made sense.
We want to avoid, huge long-term dilutions but ultimately it's going to [get down] to also just the return on capital. And we continue to be very, very disciplined as you know.
Operator
Your last question comes from the line of Bill Plovanic with Canaccord Adams. Please proceed.
Bill Plovanic - Canaccord Adams
Hi, thank you. Seemed to be last and most of these lately.
Simple question, just on the monitoring cost, as those roll off in April -- as those cost go away, one, can you quantify that? And two does that spending just get shifted to the COGS line for your compliance [this year] or compliance programs?
Dean Bergy
You know Bill, I will take that one. The reality is there is as Steve talked about, I mean we along with other companies have changed at least on the insight of lot of what we have done to manage our business here.
And there is a lot of those costs that have an ongoing impact. So there's not a, I wouldn't say there's going to be a significant amount of costs that are going to roll off.
Obviously there is some external costs that will probably help us a bit. But, I think in terms if you look at our overall cost of compliance we've included in there, we're not looking that as being a real savings opportunities going forward at this point.
Bill Plovanic - Canaccord Adams
And are there any, like, closing costs associated with that one-time charges or a big check that you have to cut when that monitor rolls off?
Dean Bergy
No.
Stephen MacMillan
We hope not unless they hit us with a final bill. Yeah, office decorations maybe.
Great, well thanks, Bill for that final question and with that our conference call for our first quarter 2009 operating results will be held on April 20th, 2009. We'll ask everyone to also hold a place on your calendars for our 2009 analyst meeting, which will be held on May 20th in New York City.
Thank you, everyone.
Operator
Thank you for your participation in today's conference. This concludes the presentation.
You may now disconnect. Good day.