Stryker CEO Discusses Q4 2010 Earnings Call Transcript

Stryker (SYK)

Q4 2010 Earnings Call

January 25, 2011 4:30 pm ET


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

Curt Hartman - Chief Financial Officer and Vice President

Katherine Owen - Vice President of Strategy & Investor Relations


Michael Matson - Wachovia

Jeffrey Johnson - Robert W. Baird & Co. Incorporated

Matthew Miksic - Piper Jaffray Companies

David Turkaly - Susquehanna Financial Group, LLLP

David Roman - Goldman Sachs Group Inc.

Robert Hopkins - Lehman Brothers

Raj Denhoy - Jefferies & Company, Inc.

Glenn Novarro - RBC Capital Markets, LLC

Derrick Sung - Bernstein Research

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

Kristen Stewart - Deutsche Bank AG

Frederick Wise - Leerink Swann LLC

David Lewis - Morgan Stanley

Vivian Cervantes - Maxim Group LLC

Doug Schenkel - Cowen and Company, LLC

Christopher Pasquale - JP Morgan Chase & Co

Steven Lichtman - Oppenheimer & Co. Inc.

Joanne Wuensch - BMO Capital Markets U.S.



Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2010 Stryker Earnings Conference Call. My name is Melanie, and I'll be your coordinator today. [Operator Instructions] .

Before we proceed, the company would like to remind you that certain statements made in today's conference call 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 market; legislative and regulatory actions; unanticipated issues arising in connection with 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 claim; unfavorable resolution of tax audits; changes in financial markets, changes in the competitive environment; and the company's ability to integrate acquisitions.

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. And now, I would like to turn the call over to Mr. Stephen McMillan, Chairman, President and CEO. Please proceed, sir.

Stephen MacMillan

Thank you, Melanie. Good afternoon, everyone, and welcome to Stryker's Fourth 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.

Before delving into the quarterly specifics, we'd like to highlight the major strategic milestones achieved in 2010 that have helped transform our company in ways that we think will be critical, not only in navigating through the current environment, but also positioning ourselves well for the future. I'll then pass the call over to Katherine and Curt to go into the specifics regarding our Q4 results before we open the call up to your questions.

2010 was a pivotal year for our company, with a number of key accomplishments that in total underscore our unique competitive strengths and that we believe will allow us to deliver top-tier results in both the short and long term.

First, we continued to make major investments in our quality and compliance systems, entering year three of the initial program that is driving myriad benefits to our company and our customers. In 2010, investors were able to see the tangible results of these considerable investments, with resolution of the remaining three FDA warning letters. This achievement represented an important milestone for our organization and signaled to us that the path that we've been on is focused and resourced appropriately, recognizing there remains room for improvement and will continue to have quality as a top priority within our organization. Simply put, we've used the challenges we faced to ensure that quality and compliance become embedded in our cultural DNA, and that the focus we've put in place over the last few years does not waver.

We also continue to optimize our capital allocation. With us now generating over $1.5 billion in cash flow from operations annually, we are not limited to a single option, but rather are able to execute on our multipronged cash deployment goals. This includes the ability to both invest for long-term sales growth via acquisitions, while also maximizing shareholder return through dividends and buybacks.

Following the acquisition of the Neurovascular division from Boston Scientific, we have invested $2.3 billion since the start of 2008 in a series of M&A targets that have both strengthened our core franchises, while also further diversifying our company into some of the fastest growth segments of med tech. During that same time, we have also returned nearly $600 million to our shareholders through dividends plus executed over $1.5 billion in share repurchases.

Building on the capital allocation achievements, we closed a number of meaningful acquisitions over the past 12 months, culminating with the Neurovascular deal that now positions us as the global leader in the roughly $1 billion Neurovascular market. With new product launches already underway and a history of delivering innovation, we are excited to have this team as part of the Stryker family.

Beyond acquisitions, we also made the strategic decision to sell OP-1 for use in orthopedic bone applications, a move that allows us to redirect the R&D to other internal projects, which we believe offer the potential for greater shareholder returns, including clinical efforts already underway with BMP-7 for potential use in osteoarthritis and research into other non-orthopedic applications. Combined, our acquisitions and divestitures have further strengthened our sales footprint, while simultaneously sharpening our R&D efforts.

Turning to our decentralized business model. It remains a critical aspect of our competitive advantage and ability to drive consistently strong results. However, as we have grown the top line to over $7 billion in sales, more than doubling our revenues since 2003, aspects of our structure have resulted in inefficiencies in certain areas, and we have opportunities to better leverage our scale. We have taken a number of steps over the past 18 months to put the infrastructure in place and to prioritize areas of opportunity. Although this initiative will have negligible earnings impact of next year or two, longer term, we believe it will provide us with additional P&L leverage that can be redeployed into sales, marketing, R&D or to offset the potential for greater pricing pressure.

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