Stryker (SYK) Q3 2011 Earnings Call October 19, 2011 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 Steven M. Lichtman - Oppenheimer & Co. Inc., Research Division Michael Matson - Mizuho Securities USA Inc., Research Division Matthew S. Miksic - Piper Jaffray Companies, Research Division Michael N. Weinstein - JP Morgan Chase & Co, Research Division Derrick Sung - Sanford C. Bernstein & Co., LLC., Research Division Topher Orr - Goldman Sachs Group Inc., Research Division Frederick A. Wise - Leerink Swann LLC, Research Division Tao Levy - Collins Stewart LLC, Research Division Rajeev Jashnani - UBS Investment Bank, Research Division Charles Chon - Stifel, Nicolaus & Co., Inc., Research Division Vivian Cervantes - Kaufman Bros., L.P., Research Division Robert A. Hopkins - BofA Merrill Lynch, Research Division Jeffrey D. Johnson - Robert W. Baird & Co. Incorporated, Research Division David Turkaly - Susquehanna Financial Group, LLLP, 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 Presentation Operator
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. Steve MacMillan, Chairman, President and CEO. Please proceed. Stephen P. MacMillan Thank you, Keisha. Good afternoon, everyone, and welcome to Stryker's third 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. Before passing the call over to Katherine and Curt to provide more specifics, we know there have been some investor concerns that we'd like to address, including the slowdown in elective procedures, capital budgets and gross margin. First, with respect to elective procedures. The Recon market continued the softness that began last year in the second quarter. While we look forward to the day the market picks back up, we feel good about our Recon portfolio and our ability to deliver even in a slower environment. Second, turning to capital budgets and the potential impact of Medicare spending. We believe there has been an understandable but misplaced overreaction. While the current economic environment remains challenged, hospitals do have access to credit, a clear difference versus the 2008-2009 downturn. Our own third quarter MedSurg results, especially our Medical business, are evidence that these markets remain solid. It's also important to note that since late 2008, we have significantly changed the composition of our MedSurg businesses, including expanding our disposables product offering with the Ascent, SONOPET, and Gaymar acquisitions. Our MedSurg businesses are better positioned now than at any point in our history to drive share gains, engage with hospital customers, leverage new product offerings and expand geographically, a fact that we believe will remain clearly the case in the fourth quarter in 2012 and beyond.
On the gross margin front, we have been negatively impacted in 2011 by a greater-than-expected degree from swings in foreign exchange rates. Although these same swings inflated our gross margin in Q2 and Q3 of 2010, the reverse has been true this year. Beyond FX, we are making the necessary investments to help unlock decentralized inefficiencies that represent a clear long-term leverage opportunity.With Lonny Carpenter now overseeing global manufacturing since the start of this year, we are investing in various aspects of this multiyear initiative, including our IT infrastructure procurement, vendor consolidation and numerous other aspects are also absorbing the various acquisitions. Ironically, it's the strength of our P&L that's enabling us to make these investments that will yield dividends longer term while not deviating from the earnings target we've provided at the start of the year. Looked at somewhat more succinctly, our underlying P&L performance is enabling us to manage through some unexpected pressures as well as M&A costs that often result in companies trimming guidance. They're not one of them. It's also worth highlighting the fact that over the past 24 months, we have bolstered our core franchises by leveraging the tremendous strength afforded by our solid cash flow and strong balance sheet via acquisitions. We've entered into key adjacent markets that are on track to help accelerate our organic growth in 2012 and beyond. With 10 acquisitions completed in the past 2 years and 4 in 2011 alone, we are committed to further broadening our sales footprint with M&A targets. And it's important to note that we are not just buying one-off growth. Every one of these acquisitions is a platform that we fully expect to grow above the rate of our core markets or the foreseeable future. Our sales mix is also strengthened considerably within our MedSurg businesses, particularly through Stryker Sustainability Solutions and more recently Gaymar. These moves have provided our sales team with a stronger product offering and a greater ability to gain market share despite some ongoing challenges in underlying elective procedure growth. We also remain highly focused on ensuring we are investing in internally driven innovation as evidenced by the 23% increase in R&D in the quarter and year-to-date, on top of a 17% increase in 2010. Read the rest of this transcript for free on seekingalpha.com