Stryker Corporation (SYK)

Q2 2010 Earnings Call

July 20, 2010 4:30 AM EST


Stephen MacMillan – Chairman, President, and CEO

Katherine Owen – VP of Strategy and IR

Curt Hartman – VP and CFO


Bob Hopkins – Bank of America

Mike Weinstein – JPMorgan

David Lewis – Morgan Stanley

Joanne Wuensch – BMO Capital Markets

Derrick Sung – Sanford Bernstein

Rick Wise – Leerink Swann

Matt Miksic – Piper Jaffray

Douglas Schenkel – Cowen and Company

Vivian Cervantes – Maxim Group

Raj Denhoy – Jefferies

Michael Matson – Wells Fargo Securities

Bruce Nudell – UBS

David Roman – Goldman Sachs

Matt [ph] – Barclays Capital

Ben Andrew – William Blair

Glenn Novaro – RBC Capital Markets

Jeff Johnson – Robert W. Baird

Bill Plovanic – Canaccord Genuity

Sameer Harish – Needham & Company



Good day, ladies and gentlemen, and welcome to the second quarter 2010 Stryker earnings conference call. My name is Emity and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions).

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.

For information concerning these risks and uncertainties please see the company's filings with the United States Securities and Exchange Commission, including the company's annual report on Form 10-K and quarterly reports on Form 10-Q.

The company does not undertake any obligation to update or revise any of its forward-looking statements. Today's conference call will also include a discussion of constant currency sales performance and adjusted diluted net earnings per share for the year ended December 31 st, 2009.

Further discussion for these non-generally accepted accounting principles financial measures, including generally accepted accounting principles reconciliation appears in the company's Form 8-K filed today with the SEC. The company’s SEC filings may be accessed from the “For Investors” page on the company's website at

I would now like to turn the call over to your host for today, Mr. Stephen MacMillan, Chairman, President and CEO. Please proceed.

Stephen MacMillan

Thank you, Emity, and good afternoon, everyone. Welcome to Stryker’s second quarter 2010 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.

Turning to our Q2 results, I’ll offer perspective on some key achievements in the quarter and an overall assessment, before turning the call over to Katherine and Curt for more details. Having completed Q2 with constant currency sales growth coming in at 7%, which is clearly towards the higher end of our targeted range for the year, we feel well positioned to deliver on our 2010 sales commitments.

With an ongoing focus on operating expenses and solid gross margin, we realized a 15% increase in operating income, while still driving a mid teens increase in R&D spending year-over-year and a net earnings increase of 10%, putting us on solid footing to achieve our targeted per share earnings goals that we outlined back in January of $3.20 to $3.30, up 8% to 12% year-over-year, despite facing a larger foreign currency revenue headwind. And we’re clearly pleased with our demonstrated ability to execute on our sales and profit outlook.

Perhaps more importantly, Q2 was highlighted by the resolution of the remaining two FDA warning letters which follows the previous lifting of the biotech and Mahwah warning letters. The removal of the warning letters is an important milestone that validates the multi-year efforts of countless people within our organization and reinforces our commitment to executing on our companywide initiative. It has allowed us to redirect some of our R&D resources that were focused on remediation and resolution of the warning letters, back to more traditional R&D activities. And we probably can’t overstate the fact that as it does relate to our quality journey, there is still work to do and we’ll continue to invest in quality on an ongoing basis. We know we have made significant improvements in our systems and our culture and we look forward to continuing to work with FDA to realize our objective of a best-in-class quality system.

As many of you on the phone well appreciates, given the diverse nature of our 18 mid tech franchises, coupled with our broad geographic presence, in any given quarter, there are parts of our business that perform ahead of our initial expectations, while others that lag.

With respect to the former, we are particularly pleased with the results achieved by all four of our MedSurg franchises, led by medical, which posted an impressive 21% year-over-year US sales increase, better than expected, even adjusting for the favorable comparisons. And after working through some challenges in Q1 tied to our quality initiative, instruments posted strong quarterly growth of 12% in the United States.

On the flipside, our reconstructive implants business was below our expectations in the quarter, while international also struggled to a greater degree than we anticipated. And, while US implants were still in positive territory on a year-over-year growth rate, the low single digit increase was disappointing.

Although, we’re very encouraged by the early reception to our new hip products, as those of you who have followed the orthopedic industry for sometime are well aware the full impact if new reconstructive implants takes a number of quarter to realize, given the significant training and education, coupled with rolling out of the needed instrumentation.

Looking at our international results, as we’ve discussed the decision we made to discontinue certain products and distributors in late 2009 is causing some short-term sales disruption. And it’s worth underscoring that our commitment to the objectives of our overall quality and compliance initiatives, require us to proactively make decisions across all our businesses in order to achieve our goal of becoming a best-in-class organization.

Although, from time-to-time, this can create sales disruption, we are fundamentally strengthening our organization for the long term. At the same time, it’s fair to say, that we’re seeing better momentum across our MedSurg franchises, a trend we expect will continue throughout 2010, underscoring the inherent strength of our diverse product portfolio, the latter of which reinforces our conviction in our ability to deliver on both the sales and earnings goal we outlined at the start of the year.

With that, I’ll turn the call over to Katherine.

Katherine Owen

Thanks Steve. Consistent with prior quarters, I’ll provide some additional commentary and perspective on several key topics, including our quality initiative, our international Q2 performance and our spinal results.

On the regulatory front, as was previously announced, Q2 was highlighted by the resolution of the remaining two initial four FDA warning letters. Although, there has been some investor speculation that this may result in the ability to lower the magnitude of our investment in our quality initiative, there is no change to our outlined three year and roughly $200 million quality spend which began in earnest in the second half of 2008.

Rather, warning letter resolution is an affirmation of the plan we outlined is moving in the right direction. As we move to the second half of 2011, we expect a downtick in the spending as one-time investments associated with the three-year plan are completed.

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