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Stryker Corporation (SYK)

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Stryker Corp. (SYK)

Q4 2017 Results Earnings Conference Call

January 30, 2018, 16:30 ET

Executives

Kevin Lobo - Chairman and CEO

Katherine Owen - VP Strategy and Investor Relations

Glenn Boehnlein - CFO

Analysts

David Lewis - Morgan Stanley

Michael Weinstein - JPMorgan

Bob Hopkins - Bank of America Merrill Lynch

Chris Pasquale - Guggenheim Securities LLC

Rick Wise - Stifel

Kristen Stewart - Deutsche Bank

Bruce Nudell - SunTrust

Raj Denhoy - Jefferies

Matthew O'Brien - Piper Jaffray

Glenn Novarro - RBC Capital Markets

Larry Biegelsen - Wells Fargo

Joanne Wuensch - BMO Capital Markets

Isaac Ro - Goldman Sachs

Kyle Rose - Canaccord Genuity

Josh Jennings - Cowen

Kaila Krum - William Blair

Craig Bijou - Cantor Fitzgerald

Presentation

Operator

Welcome to the Fourth Quarter 2017 Stryker Earnings Call. My name is Sandra and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Following the conference, we will conduct a question-and-answer session. During that time, participants will have the opportunity to ask one question and one follow-up question. [Operator Instructions] 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 Lobo

Welcome to Stryker's fourth 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, with an update on Mako. Glenn will then provide additional details regarding our quarterly results, before we open the call to Q&A.

2017 was another strong year for Stryker, including an impressive Q4 organic sales growth of 8.1%. And we again face tough year-over-year comparisons in Q4 across all three groups, Orthopaedics, MedSurg and Neurotechnology and Spine, underscoring the strength of our diversified revenue model.

Growth was also balanced geographically with the U.S. posting organic gains of 8.6%, while OUS was up 6.7%. Within international growth was consistent across regions and Europe posted high single-digit gains for the third consecutive year, since we implemented the Transatlantic Operating Model.

There were numerous standout above market performances in the quarter, which Glenn will cover in his section. For the full year despite Sage product supply issues, three major hurricanes and one less selling day, organic sales growth topped 7% exceeding our raised guidance of 6.5% to 7%.

Both our Q4 and full year results reflect excellent sales and marketing execution coupled with value added innovation delivered by R&D and acquisitions. And through the tremendous effort of our global quality and operations team, we ensured continued product supply following the hurricanes as well as meeting our targets to return Sage products to the market. We continue to make strong progress with our cost transformation for growth initiatives which are yielding tangible results that will sustain ongoing operating margin expansion.

Adjusted per share earnings claim 10.1% to a $1.96 for Q4 and we are up nearly 12% to $6.49 for the full year topping our targeted range of 635 to 645 established at the start of 2017. As you look ahead to 2018, we expect our top-line momentum to continue and target organic sales growth of 6% to 6.5% for the full year, which we believe will once again be at the high end of med tech.

Our outlook reflects robust product cycles across our divisions, continued strong sales and marketing execution and the benefit from acquisitions that are the past one year mark. The recent U.S. tax reform legislation and acquisition dilution will create headwinds for us in 2018, but with our strong top-line and operating margin expansion we are targeting full year adjusted per share earnings of $7.07 to $7.17.

With that, I will now turn the call over to Katherine.

Katherine Owen

Thanks Kevin. My comments today will focus on Mako, noted in our prerelease earlier this month momentum continued with Q4 Mako robot installations totaling 35 globally with 27 in the U.S. And in Q4 we had our first robot sale in Japan with approval for the Total Knee application expected by year end.

We are also pleased that upgrades of existing robots in the field to the Total Knee application are pacing ahead of plan. Upgrades of our existing customers with the big focus in Q4 which does take considerable time from our capital sales force to close. We expect continued new robot installation as well as completing upgrade of the majority of robots in the U.S. during 2018.

Since launch of the Total Knee application we have trained over 800 surgeons including roughly 200 in the fourth quarter. Mako Total Knee procedures for 2017 were 15,778 of which nearly 20% more with competitive surgeons who are using our Triathlon Total Knee implant for the first time.

We continue to see approximately 40% of our robots installed in competitive accounts where we have well below average or no market share. We are clearly seeing the pull through spectrum accounts with Mako as our U.S. primary knee sales in Mako Total Knee accounts grew at 5 times the rate of accounts without the Mako Total Knee application. For all Mako applications, procedures in 2017 topped 42,500 versus 22,000 the prior year with all three applications growing.

Mako utilization rates also continued to climb increasing over 40% year-over-year in the fourth quarter for all Mako procedures and up roughly 30% sequentially fueled by Total Knee. We exited the year with Mako robots in 372 U.S. hospitals which represents about 10% of our customer base. We remain very encouraged by the strong customers’ feedback which we anticipate will be evident at the upcoming AAOF meeting in March and subsequent surgeon meetings throughout the year.

During 2017 we sold robots into a number of top tier academic hospitals where many of the industry key opinion leaders are camping the technology. This is enabling competitive conversions driven by surgeons focused on improved clinical outcomes achievable with the Mako total needs.

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