Stryker (SYK)

Q4 2011 Earnings Call

January 24, 2012 4:30 pm ET

Executives

Curt R. Hartman - Chief Financial Officer and Vice President

Stephen P. MacMillan - Chairman of the Board, Chief Executive Officer and President

Katherine A. Owen - Vice President of Strategy & Investor Relations

Analysts

Adam T. Feinstein - Barclays Capital, Research Division

Glenn J. Novarro - RBC Capital Markets, LLC, Research Division

Michael Matson - Mizuho Securities USA Inc., Research Division

Matthew S. Miksic - Piper Jaffray Companies, Research Division

Tao Levy - Collins Stewart LLC, Research Division

Vivian Cervantes - Kaufman Bros., L.P., Research Division

David H. Roman - Goldman Sachs Group Inc., Research Division

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Joanne K. Wuensch - BMO Capital Markets U.S.

Kristen M. Stewart - Deutsche Bank AG, Research Division

Matthew O'Brien - William Blair & Company L.L.C., Research Division

Jason Wittes - Caris & Company, Inc., Research Division

David R. Lewis - Morgan Stanley, Research Division

Kimberly Weeks Gailun - JP Morgan Chase & Co, Research Division

Raj Denhoy - Jefferies & Company, Inc., Research Division

Presentation

Operator

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Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 Stryker Corporation Earnings Conference Call. My name is Regina, and I will be your conference operator for today. [Operator Instructions] Today's event is being recorded for replay purposes.

Certain statements made in this presentation may contain information that includes or is based on forward-looking statements within the meaning of the federal securities law that are 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.

Such factors include, but are not limited to, 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 markets, legislative and regulatory actions; unanticipated issues arising in connection with the clinical studies and otherwise that affect U.S. Food and Drug Administration approval of new products; changes in reimbursement levels from third-party payers; a significant increase in product liability claims; resolution of tax audits; changes in financial markets; changes in the competitive environment; the company's ability to integrate acquisitions; and the company's ability to realize anticipated cost savings as a result of workforce reductions and other restructuring activities.

Additional information concerning these and other factors are contained in the company's filings with the U.S. Securities and Exchange Commission, including the company's annual report on Form 10-K and quarterly reports on Form 10-Q.

I would now like to turn the conference over to your host for today, Mr. Stephen MacMillan, Chairman, President and Chief Executive Officer. Please go ahead, sir.

Stephen P. MacMillan

Thank you, Regina. Good afternoon, everyone, and welcome to Stryker's fourth quarter 2011 earnings report. With me today are Curt Hartman, our Vice President and Chief Financial Officer; and Katherine Owen, Vice President of Strategy and Investor Relations. Similar to prior calls, I will make some comments before turning the call over to Katherine and Curt for more details before opening up the call to your questions.

As we look back on our financial results for 2011, both for fourth quarter and the year, we were encouraged on multiple fronts while remaining cognizant of the current economic environment. Our results again demonstrate that our balanced diversification uniquely positions us to steadily deliver top-tier results. Against that backdrop, we would like to touch on several key highlights from the quarter and the year.

We completed 2011 with over $8.3 billion in sales, up 13% on a reported basis and reflecting mid-single digit organic growth, augmented by the benefit from a series of key strategic acquisitions as well as a currency tailwind. Our adjusted EPS came in at $3.72, up 12% and at the high end of the guidance we put forth at the start of the year or adjusted per-share earnings of $3.65 to $3.73. This came despite absorbing additional dilution associated with several acquisitions and the recently announced Biotech settlement.

With 11% constant currency sales growth, our MedSurg segment once again demonstrated the tremendous strength of the product portfolio, customer relationships and ability to drive ongoing market share gains. We head into 2012 with strong momentum, a compelling lineup of new products and a high degree of conviction regarding our ability to continue to deliver strong growth in these businesses.

Shifting to Neurotechnology and Spine, although challenges remain within our Spine franchise, the new product launches for our Neurovascular segment continue to gain traction, resulting in better-than-expected results for a business that we acquired at the start of 2011. And with the acquisition of Concentric in early Q4, we have expanded our stroke presence into the ischemic segment, allowing Stryker to be uniquely positioned with a market-leading total stroke product offering in this high growth and highly innovative segment of med tech.

In addition to Neurovascular and Concentric, we utilized our strong cash flow to execute on our strategy of strengthening our core businesses via targeted acquisitions. This was evident with the acquisition of Memometal, which broadens our offering in the high-growth extremities space, as well as Orthovita, which we are leveraging across multiple Stryker franchises.

Similar to the Gaymar and Sonopet deals that we did in 2010, we are pleased with the performance of all these targets and excited about their ability to both drive stronger core sales growth going forward while also providing important operating leverage as we drive greater sales through our existing teams.

During 2011, we further clarified and strengthened our capital allocation strategy and view it as an important competitive strength to continue to maximize shareholder value. While we believe highly focused acquisitions are the best use of our cash flow, we remain committed to our three-pronged cash strategy, which also includes dividends and share repurchases. Despite our robust activity over the last couple of years, we enter 2012 with a net cash position of over $1.6 billion, so our balance sheet remains an important competitive strength for 2012 and beyond.

Although our Reconstructive implant growth slowed sequentially, reflecting the anticipated impact of difficult year-over-year comparisons and one less selling day, we are encouraged by the ramp in our MDM large hip offering as well as the traction that our customized cutting guides are now seeing within knees. While we conservatively assume no improvement in elective procedure trends in 2012, we believe that share gains in hips and knees are achievable. And if the economic environment and/or the degenerative nature of osteoarthritis results in a stronger rebounded implant procedures, we are well positioned to capitalize on the volumes.

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