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Stryker Corporation (SYK)

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Stryker Corp. (SYK)

Q1 2018 Earnings Call

April 26, 2018 4:30 pm ET

Executives

Kevin A. Lobo - Stryker Corp.

Katherine A. Owen - Stryker Corp.

Glenn S. Boehnlein - Stryker Corp.

Analysts

Bob Hopkins - Bank of America Merrill Lynch

David Ryan Lewis - Morgan Stanley & Co. LLC

Chris Pasquale - Guggenheim Securities LLC

Isaac Ro - Goldman Sachs & Co. LLC

Bruce M. Nudell - SunTrust Robinson Humphrey, Inc.

Vijay Kumar - Evercore Group LLC

Larry Biegelsen - Wells Fargo Securities LLC

Matthew Henriksson - BMO Capital Markets (United States)

Glenn John Novarro - RBC Capital Markets LLC

Kristen Stewart - Deutsche Bank Securities, Inc.

Robbie J. Marcus - JPMorgan Securities LLC

Kevin M. Farshchi - Piper Jaffray & Co.

Craig William Bijou - Cantor Fitzgerald Securities

Richard Newitter - Leerink Partners LLC

Kyle William Rose - Canaccord Genuity, Inc.

Amit Hazan - Citigroup Global Markets, Inc.

Joshua Jennings - Cowen and Company, LLC

Jeff D. Johnson - Robert W. Baird & Co., Inc.

Presentation

Operator

Welcome to the First Quarter 2018 Stryker Earnings Call. My name is Brian, 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. 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 the 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 first quarter earnings call. Joining me today are Glenn Boehnlein, Stryker's CFO, and Katherine Owen, Vice President, 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.

Our Q1 performance exceeded our expectations and positions us well for another strong year in 2018. Organic sales growth was an impressive 7% despite one less selling day in the quarter versus 2017 and was well balanced across businesses and geographies. There were a number of standout performances in the quarter as we innovate through internal investments, effectively running our sales and marketing offense and execute on sales and acquisitions.

Neurotechnology and Spine led the way, delivering 10% increase in organic sales, powered by Neurovascular growth of 20%, reflecting strength in both hemorrhagic and ischemic stroke. MedSurg had strong organic growth of roughly 8% as Endoscopy continued to post strong double-digit growth in its core business and also had good performance from NOVADAQ.

We are pleased with the speed of integration since we closed last November, and our unified sales force is driving share gains across the portfolio. Entellus, which closed in March, is also off to a strong start and is reported within Neurotechnology. The early success of these deals underscores the benefit of prioritizing M&A, which has become a core strength for Stryker in both identifying attractive targets and executing post closing.

Turning to Ortho, sales were up nearly 5% organically, led once again by strong growth in trauma and knees. And Mako had another strong quarter with a significant increase in new robot installations year-over-year.

Geographically, we had strong performances in Japan, South Pacific and Canada while Europe was a bit softer than the recent trends owing to the bed blockages in the UK. And emerging markets had a solid quarter, posting double-digit growth. The robots top line coupled with the benefits tied to our cost transformation for growth, which we call CTG, drove a meaningful year-over-year increase in our adjusted operating margin to 25%.

As Glenn will discuss in more detail, the previously announced adoption of certain accounting guidance changes had some benefit to our operating margin. But after adjusting for this impact, our adjusted operating margin expanded 50 basis points year-over-year despite acquisition dilution in 2018. I'd like to take a moment to thank Lonny Carpenter and his team for their efforts in driving CTG, which is now beginning to translate into improved operating margin performance.

As many of you know, after 30 stellar years at Stryker, Lonny recently announced his plans to retire. Lonny has made too many contributions to Stryker over three decades to attempt to cover them here, but his commitment to driving CTG and its sustainable impact on our margins is certainly one of the thumbprints he will leave on our company.

Turning back to the P&L. With a strong top line, we continue to support investments in sales, marketing and R&D that will help deliver sales growth at the high end of med tech. Our operating margin expansion coupled with the benefits from foreign currency and tax resulted in adjusted per share earnings increase of 13.5% to $1.68, above the high end of our targeted range.

Based on our Q1 outperformance and the outlook for the remainder of the year, we have raised our expectations for both full year organic sales growth and adjusted EPS. We're also well positioned to deliver a minimum of 30 basis points to 50 basis points of operating margin expansion.

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

Katherine A. Owen - Stryker Corp.

Thanks, Kevin. My comments today will focus on Mako. In the first quarter, we installed a total of 28 robots globally with 24 in the U.S. compared to a total of 18 in the year-ago quarter, of which 11 were in the U.S. Upgrade to robots in the field for the total knee application continued, reaching approximately 70% by the end of Q1. We remain on track to have the vast majority of the robots in the U.S. upgraded by Q3. Of the robots installed in Q1, over 50% were in competitive accounts with Stryker either had no knee market share or our share is well below our average level.

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