Stryker Corp. (SKY)
Q2 FY08 Earnings Call
July 17, 2008, 4:30 PM ET
Stephen P. MacMillan - President and CEO
Dean H. Bergy - VP and CFO
David Lowman - Morgan Stanley
Michael Weinstein - JP Morgan
Raj Denhoy - Thomas Weisel Partners
Bruce Nudell - UBS
Kristen Stewart - Credit Suisse
Michael Matson - Wachovia Capital Markets
Doug Schenkel - Cowen and Co.
Michael Jungling - Merrill Lynch
Joanne Wuensch - BMO Capital Markets
Frederick Wise - Leerink Swann
Lawrence Keusch - Goldman Sachs & Co.
Tao Levy - Deutsche Bank
William Plovanic - Canaccord Adams
Jeff Johnson - Robert W. Baird & Co.
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Certain statements made in today's conference call may constitute forward-looking statements. They will be based upon management's current expectations and will be subject to various risks and uncertainties that could cause the company's actual results to differ materially from those expressed or implied in such statements. In addition to factors that may be discussed in this call, such factors include but are not limited to, pricing pressures generally, including cost containment measures that could adversely affect the price of or demand for the company's products, regulatory actions, unanticipated issues arising in connection with the clinical studies and otherwise that affect United States Food and Drug Administration approval of new products; changes in reimbursement levels from the third-party payers, a significant increase in product liability claims, change in economic conditions that adversely affect the level of demand for the company's products, change in foreign exchange markets, change in financial markets and change in the competitive environment.
Additional information concerning these and other factors are contained in the company's filings with the Securities and Exchange Commission, including the company's annual report on Form 10-K and quarterly reports on Form 10-Q. Today's conference call will also include a discussion of adjusted net earnings from continuing operations for the comparative quarter and six months ended June 30, 2007.
Further discussion in a non-GAAP financial measure including a GAAP reconciliation apparent in the company's Form 8-K filed today with the United States Securities and Exchange Commission, which may be accessed from For Investors page on the company's website at www.stryker.com.
I would like to now turn the call over to your host for today Mr. Stephen P. MacMillan, President and Chief Executive Officer. Sir, you may proceed.
Stephen P. MacMillan - President and Chief Executive Officer
Thank you, Kathie and good afternoon, everyone. And welcome to Stryker's second quarter 2008 earnings report. With me today are Dean Bergy, our Vice President and Chief Financial Officer; and Katherine Owen, Vice President of Corporate Strategy and Investor Relations.
We had a few challenges in the quarter and, as always, there will be a few things to focus but our unique set of businesses delivered strong results once again, posting our 30th straight quarter of double-digit sales growth. While favorable calendar and currency helped in the quarter by adding over 4 points of growth to our top line, overall reported sales growth was 17%, and earnings were, again, up over 20%.
With strong performances from our international businesses, our growth was remarkably balanced on a geographic basis, with both the U.S. and international businesses up about 12.5% operationally in the quarter. This represents significant upticks in our European, Pacific and Latin America businesses. And total reported international growth was up 25% in the quarter.
Internationally, all five of our Orthopaedic Implants businesses, hips, knees, spine, trauma and CMF, delivered accelerating growth rates and exceeded 20% combined sales growth on a reported basis.
MedSurg also had another impressive quarter, posting over 20% reported growth and up 18% operationally. Our international expansion efforts continued to pay off as reported MedSurg growth was up a remarkable 37% in the quarter and 25% operationally. Our U.S. businesses also continued to be strong up over 15% in the quarter. Thus, we continue to be optimistic about our long-term prospects of the growth in MedSurg.
We now turn to update on quality and compliance. We have been actively engaged in discussions with FDA, as we work to remediate our existing warning letters but also it's to harmonize and strengthen our compliance systems across the Corporation. While a highly decentralized organization helps drive exceptional commercial success over the years, it has also made it more difficult to deliver the consistent company-wide compliant systems which FDA expects.
The magnitude of the upward [ph] ahead of us is big. And earlier this year, we began a major revamping of our approach to our quality and compliance systems. And it will take time, money, and management focus, throughout the organization.
We would expect costs of this effort to be at least $50 million per year, for the next few years and will likely result in the addition of several hundred new people around the world.
So, what should you make of all of this? It's pretty simple. We have a lot of work to do, but we are channeling our can-be-spirit to the area of compliance and attacking it like we attack all challenges with focus and energy. And from a position of financial strength, it should allow us to continue to deliver, while also getting stronger.
I will now turn it over to Dean, for more details.
Dean H. Bergy - Vice President and Chief Financial Officer
Thanks, Steve. I would like to start with the impact of foreign currency on our sales in the quarter. As in the first quarter, foreign currency was very favorable this quarter. The weakening of the U.S. dollar added $65 million to international sales and increased the company's overall sales growth by 4.4%.
In the second quarter, the dollar weakened approximately 16% against the euro, and about 13% against the yen, when compared to the prior year. If currency rates hold near June 30th levels, we expect the impact of foreign currency will increase third quarter 2008 sales by about 2.5% to 3% versus the prior year.
Now, I'll spend a moment on the impacts of price and volume mix on the top line. Selling prices were up about 0.5% on a worldwide basis in the quarter, the domestic prices up 1%, and the international prices declining slightly as a result of the April 1st, 2008 government reimbursement cuts in Japan.