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Stryker Corporation (SYK)

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Stryker Corp. (SYK)

Q3 2017 Earnings Call

October 26, 2017 4:30 pm ET

Executives

Kevin A. Lobo - Stryker Corp.

Katherine A. Owen - Stryker Corp.

Glenn S. Boehnlein - Stryker Corp.

Analysts

David Ryan Lewis - Morgan Stanley & Co. LLC

Robert Hopkins - Bank of America Merrill Lynch

Michael Weinstein - JPMorgan Securities LLC

Ian Mahmud - Barclays Capital, Inc.

Matthew Keeler - SunTrust Robinson Humphrey, Inc.

Kristen Stewart - Deutsche Bank Securities, Inc.

Matt O'Brien - Piper Jaffray & Co.

Chris Pasquale - Guggenheim Securities LLC

Frederick Wise - Stifel, Nicolaus & Co., Inc.

Lawrence Biegelsen - Wells Fargo Securities LLC

Matt Miksic - UBS Securities LLC

Isaac Ro - Goldman Sachs & Co. LLC

Joanne Karen Wuensch - BMO Capital Markets (United States)

Glenn John Novarro - RBC Capital Markets LLC

Kaila P. Krum - William Blair & Co. LLC

Joshua Jennings - Cowen and Company, LLC

Raj Denhoy - Jefferies LLC

Presentation

Operator

Welcome to the Third Quarter 2017 Stryker Earnings Call. My name is Andrew and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Following the conference, we will conduct a question-and-answer session. During that time, participants will have the opportunity to ask one question and one follow-up question. This conference call is being recorded for replay purposes.

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

Welcome to Stryker's third quarter earnings call. Joining me today are Glenn Boehnlein, Stryker's CFO; and Katherine Owen, VP of Strategy and Investor Relations.

For today's call, I'll provide opening comments followed by Katherine, who will have an update on Mako, along with comments on our recently completed acquisition of NOVADAQ and the VEXIM deal. Glenn will then provide additional details regarding our quarterly results, before we open the call to Q&A.

Our Q3 organic sales growth of 5.5% reflected continued strong performance, despite weather-related challenges, the previously announced Sage product issues, and one less selling day. We estimate the combined impact of Sage and weather negatively impacted our Q3 sales by approximately 240 basis points versus 2016.

We benefited from standout performances in Neurotechnology, Endoscopy, Trauma and Extremities, and Mako, as well as double-digit growth in both our legacy Medical businesses and Physio-Control.

Turning to Puerto Rico, as many of you are aware, we have a manufacturing facility on the island which produces products for our Endoscopy and Instruments divisions. We are extremely pleased with how our team has managed through this unprecedented disaster and, most importantly, we can report that we've had contact from 100% of our employees.

Stryker has formed a Puerto Rico fund to aid employees specifically affected by the hurricane and is providing direct financial aid with all employee contributions matched dollar-for-dollar by the company.

With respect to our customers, through the preparation and deployment of our business continuity plans, we've seen minimal disruption to product supply and do not anticipate any material financial impact going forward.

The safety stock stored in our U.S. central distribution center has maintained customer supply, while we restore our manufacturing operations and supply chain. The facility is currently ramping up production, and newly manufactured goods are being shipped from the island.

Against this backdrop, I'd like to take a moment and recognize the outstanding work of our Global Quality and Operations organization in Puerto Rico and around the globe in minimizing these supply disruptions.

In Houston and Florida, given the impact of the hurricanes, there were canceled procedures during Q3 and some delays to capital purchases. We expect those procedures and capital purchases to be rescheduled and don't anticipate any meaningful impact to our business in Q4.

Turning to Sage. In August, we announced a recall of certain products and a ship hold of other products as we switched to a new testing methodology. Encouragingly, we began shipping products during September and have now commenced shipments from all product families.

We have work to do with our customers, given the disruption these events caused to their practices. Given Sage's market leadership position, which reflects the value-add of their product portfolio, we expect to regain lost market share over the coming quarters.

Overall, our third quarter presented our teams with a number of unique challenges that were largely unexpected. Given the strength of our diversified portfolio, effective business continuity planning and commitment of our employees around the globe, we're able to largely meet the needs of our physician and hospital customers.

As we look ahead to the balance of the year, we are excited about the recent acquisition of NOVADAQ and the VEXIM deal, which will help ensure we continue to deliver organic sales growth at the high end of med tech.

We expect full-year organic sales growth of 6.5% to 7% and adjusted EPS of $6.45 to $6.50 per share, despite incurring the added dilution associated with the NOVADAQ acquisition.

I will now turn the call over to Katherine.

Katherine A. Owen - Stryker Corp.

Thanks, Kevin. My comments today will focus on an update on Mako, the recent NOVADAQ acquisition and the VEXIM deal announced earlier this week.

Starting with Mako, during Q3, we sold a total of 33 robots, of which 23 were in the U.S., with roughly 40% in competitive accounts. We continue to update robots in the field with the Total Knee application, which now exceeds 50% of the roughly 385 robots installed in the U.S.

Surgeon training on the Total Knee application is ongoing with approximately 600 trained through the third quarter, enabling 9,400 Mako Total Knee surgeries since launch.

For the quarter, TKA procedures on the Mako increased approximately 50% from Q2 to approximately 4,500. And it's worth noting that total robot utilization rates continue to climb, increasing roughly 50% compared to the third quarter of the prior year.

During Q3, we received 510(k) clearance for our cementless product offering to be used with the Mako Total Knee application. With approximately 20% of our total knees now being performed with our cementless offering, it's clear that there's strong surgeon interest since we first launched the product over three years ago.

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