Stryker Management Discusses Q2 2012 Results - Earnings Call Transcript

Stryker (SYK)

Q2 2012 Earnings Call

July 18, 2012 4:30 pm ET


Curt R. Hartman - Interim Chief Executive Officer, Chief Financial Officer and Vice President

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


Richard Newitter - Leerink Swann LLC, Research Division

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

Michael Matson - Mizuho Securities USA Inc., Research Division

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Kristen M. Stewart - Deutsche Bank AG, Research Division

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

Matthew Keeler - Crédit Suisse AG, Research Division

Matthew Taylor - Barclays Capital, Research Division

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

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

David R. Lewis - Morgan Stanley, Research Division

Matthew S. Miksic - Piper Jaffray Companies, Research Division

Derrick Sung - Sanford C. Bernstein & Co., LLC., Research Division

Rajeev Jashnani - UBS Investment Bank, Research Division

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

Lawrence Biegelsen - Wells Fargo Securities, LLC, Research Division

Jeffrey D. Johnson - Robert W. Baird & Co. Incorporated, Research Division

Steven M. Lichtman - Oppenheimer & Co. Inc., Research Division

William J. Plovanic - Canaccord Genuity, Research Division



Before we begin, I would like to remind you that the discussions during this conference call will include forward-looking statements. Factors that could cause the 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. Reconciliation to the most directly comparable GAAP financial measures can be found in today's press release that is in the exhibit to Stryker's current report on Form 8-K filed today with the SEC.

Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 Stryker Company's Earnings Conference Call. My name is Chanel, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Curt Hartman, Interim Chief Executive Officer and Vice President and Chief Financial Officer. Please proceed.

Curt R. Hartman

Thank you, Chanel, and good afternoon, everyone, and welcome to Stryker's second quarter 2012 earnings report. Joining me on the call is Katherine Owen, Vice President of Strategy and Investor Relations. In terms of the format for today's call, I will provide opening comments and then turn the call over to Katherine for an update on several key focus items. I will then cover the financials before opening the call up to your questions.

Turning to our second quarter results, sales finished at $2.1 billion, up 3% as reported and 5% in constant currency, with the U.S. market increasing 7.7% while the international market was up 3.3%, excluding currency.

Acquisitions contributed 2 percentage points to our top line, yielding 3% underlying business growth. Importantly, across all 3 of our key segments, Reconstructive, MedSurg and Neurotech and Spine, there were drivers of the sales gains. Specifically, U.S. Reconstructive delivered underlying growth of 7%, reflecting a 6% and 4% increase in hips and knees, respectively. While Trauma and Extremities advanced by 11%, absent the influence of acquisitions.

Within MedSurg, instruments had another strong quarter with global constant currency growth of 11% and U.S. growth of 13%, underscoring the accelerating momentum from our fourth quarter 2011 launch of our System 7 platform. Finally, Stryker Sustainability Solutions posted a third quarter in a row of over 20% growth.

Turning to Neurotech and Spine, solid growth across all the Neurotech segments, coupled with the Orthovita acquisition influence in Spine, helped to offset the continued downward pressure in the core Spine segment. Overall, we are pleased with the general performance across the numerous segments.

However, as we have previously communicated, we did experience weaker results in certain geographies, particularly Europe, and to a lesser degree, Japan, as well as a decline in our U.S. medical results. With respect to the weakness we saw in Europe, it remains consistent with our expectations that we discussed earlier in the quarter. Looking ahead, we believe the outlook for our European business is aligned with current market realities.

All told, collectively, the strength of our broad-based and geographically diverse revenue model was evident as we remain on track to deliver on our full year financial targets.

Overall, our top line growth, combined with gross margin expansion and ongoing cost controls, translated into adjusted per share earnings of $0.98, up 9%. Encouragingly, our gross margin reflects a traction we are starting to see from our focus on global quality and operations. Recognizing these efforts are still in the early stages but nonetheless, underscore longer-term potential. And our increased focus on cash generation was also evident with Q2 cash from operations totaling $457 million, a marked improvement over Q1.

With respect to the CEO search, the board continues its efforts, which as discussed previously, include reviewing both internal and external candidates. Although not possible to predict the exact timing, the board does anticipate a decision regarding a permanent CEO during 2012.

As we look ahead to the second half of 2012, we are positioned to deliver on both our sales and EPS commitments, reflecting the collective benefit of a number of key new products across our various businesses. This, coupled with an ongoing focus on driving operating margin expansion through improved efficiency and cost controls, is expected to result in 10% or better per share earnings gains in 2012.

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

Katherine A. Owen

Thanks, Curt. There are 2 topics where I will try and provide some details, including hip and knee pricing and elective procedure trends and an update regarding key new product launches.

Starting with pricing, please note that the press release includes a breakdown of our sales growth by volume mix and price for our 3 key business segments: Reconstructive, MedSurg and Neurotechnology and Spine. As it relates to our U.S. hip and knee pricing, the overall trend improved again this quarter, with mix largely offsetting some pricing pressure. Although difficult to demystify, we view Reconstructive trends as stable to modestly improving as the market appears to be moving toward more normalized rates that are likely in the low-to-mid single digits.

Our assumption for underlying full year global reconstructive growth of not more than 3% we believe remains reasonable, with the U.S. likely to continue to track north of these levels, partly offset by some softness in certain geographies such as Europe.

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