Stryker Corporation - Shareholder/Analyst Call

Stryker Corporation (SYK)

September 06, 2012 9:00 am ET


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

Kevin A. Lobo - Group President of Orthopaedics

Timothy J. Scannell - Group President of MedSurg and Spine

Ramesh Subrahmanian - Group President of International

Lonny J. Carpenter - Group President of Global Quality & Operations

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


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

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Matthew S. Miksic - Piper Jaffray Companies, Research Division

Kristen M. Stewart - Deutsche Bank AG, Research Division

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

Michael Matson - Wells Fargo Securities, LLC, Research Division

Michael Matson - Mizuho Securities USA Inc., Research Division

David R. Lewis - Morgan Stanley, Research Division

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

Bruce M. Nudell - Crédit Suisse AG, Research Division

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

David Keiser - Northcoast Research


Curt R. Hartman

Good morning, everybody, and welcome to Stryker's 2012 Analyst Day. And for those who were here last night at our product fair, we appreciate your attendance last evening. My name is Curt Hartman. I'm the interim CEO and Vice President and Chief Financial Officer, and I'll be your host today. You can see that I am joined by other members of the executive leadership team who I will introduce shortly. Before we begin, I'd like to just point out our forward-looking statement, which is available for further review at your leisure.

Our executive leadership team today, I thought I'd start here because it's a great place in terms of introducing you to the company and its leaders. You can see we have Steven Benscoter, our Vice President of Human Resources, with the company 17 years; Lonny Carpenter, well known within the company, 23 years; Curtis Hall, not present today, our Vice President and General Counsel, 18 years; myself, 22 years; Kevin Lobo, seated behind me to celebrate his one-year anniversary in May; Katherine Owen, many of you know, 5 years with the company; Tim Scannell, seated behind me, 22 years; and Ramesh Subrahmanian, just celebrating his one year this month.

In totality, there's over 100 years of Stryker experience. If you add up the broader med tech experience of the group, it's closer to 150 years. Reason I'd point that out, it is a seasoned med tech team, and I think that's very important in today's environment, that you understand the management and leadership style that this group brings to the table each and every day.

Our agenda today, you might get a little sick of me because you're going to see me 3 different times, I'm going to cover the overview and I'll drive right into the Neurovascular business because that business reports to me. Kevin will get up, and when Kevin get up here, he'll give a further introduction on his background and talk about our Orthopaedics business. Tim will speak on MedSurg and Spine. For those of you who've participated in the past years, you've heard Tim before and you know the credibility he brings to those businesses. This year, in a new format, we've asked Ramesh to speak on behalf of our International business. He's got one year under his belt evaluating and moving this business. We thought we'd take the opportunity to have him share some of his thoughts both where we are today and what we see in the future. Lonny Carpenter will then speak about our global quality and ops, progress and where we see ourselves going. Again, Lonny is past presenter at this session. I'll then wrap up with a financial overview. And in the interest of I'm sure everybody in the room, we have plenty of time for investor and analyst Q&A. In addition, for those who are here in Mahwah, we do have plant 2 rescheduled, and those we'll meet at the end of the session at the bottom of the stairs.

So diving right into our agenda today and what we hope to accomplish. Number one, give you an overview. We would like you to leave here understanding the diversity of our sales footprint. Give you an update, which we do every year, on innovation, new products that have been introduced to the market, the launches and where we see them and where we see them taking us. And that will come from our commercial leaders. As I mentioned earlier, Ramesh will speak about international, driving improvements in developed markets, places like Europe, and how we're going to expand in the emerging markets. Analysis of key market dynamics and the outlook for Stryker, trends, challenges and opportunities. At the end of each section, we will have a slide that covers those. A review of our capital allocation strategy, which I know is on the minds of many analysts and investors. And then we're going to touch briefly on 2012 and 2013. I know there's a lot of thoughts right now on 2013, and we'd like to try to provide a little more clarity. Be warned, we're not going to give you full guidance. We will provide a little more clarity on how we see ourselves getting to the goals we've set out. So hopefully, that makes sense for everybody.

I'm going to start with a little bit of history for those who are not as familiar with the company. 75 years of innovation is the title of the slide. We have over 57,000 products across the 3 reporting segments: Reconstructive, MedSurg, Neurotech and Spine. The slide also serves an additional purpose. If you look in the middle row, at beds and stretchers, and over on your left, the power tools, those 2 products are Dr. Stryker originals. Dr. Stryker invented the first power tool, and he started the company on the basis of the Orthopedic Frame Company. Everything else you see on this slide has come through acquisition. So people who looked at Stryker over the last 3 years have said, "You've become highly acquisitive." The fact of the matter, we've always been an acquiring company. What we've then been able to do is take underrepresented products or underdeveloped products, put them through a great R&D mechanism and execute the heck out of them to take a leadership position in the markets we serve.

This slide is a bit of an eye chart, and I'll qualify it. This slide represents all the individual segments that Stryker participates in. So you would expect, on the horizontal axis across the top, that Stryker would have black boxes in every category. So I don't want to be disingenuous here. But what we're attempting to show is that in the 3 categories, Reconstructive, MedSurg, Neurotech and Spine, of the host of competitors across the top, there's no one in those 3 segments that offers the breadth that we offer in those segments. So the message here is when we dive into a segment, we don't dabble, we go all in. And I think that reflects our acquisition of Ascent, and I think it is reflected in our acquisition of Neurovascular. We went after those, get into a new segment and we did it in a market share-leading approach.

This slide represents the company's history. Again, a little bit backward looking in terms of where we've been. You can see sales on the top, a nice, increasing trend even in 2009 in the midst of a very tough economic environment. Adjusted EPS, always climbing. I'm going to jump over dividends. I'll circle back on that in a moment. And R&D has been in a nice, upward trend. Somewhere in the midpoint of that 5% to 6% of sales range that we have historically targeted, in recent years it's been in the higher end of that. And as we've talked about this year, R&D, on a dollar for dollar basis, will essentially be flat with prior year because of the divestiture of the Biotech business and moving those R&D dollars into other parts of the company.

Coming back to dividends, there is a lot of rhetoric right now about capital allocation strategies. The point of this slide, and I'll circle back in a little bit later, we don't feel compelled right now to make any big change in our approach on dividends. We have had a very consistent and measured and, I would argue, aggressive approach on our dividend policy for the last 5 years. And I'll circle back in a little bit later, but I want to tee that up right now.

This slide is what I'm going to refer to as a transition slide. Escalating costs driving evolution not only in health care but within Stryker. This data comes from the Center for Medicare & Medicaid. In 1980, $235 billion was spent, and a slice of the pie where Stryker contributed or participated was other medical durables representing 6%. Fast forward 29 years later, right in the midst of the deep macroeconomic dive, that pie had increased in revenue spent 10x. Now as a company, we've participated in medical durables. Our slice went to 3%. But on an absolute dollar basis, clearly, the slice of the pie is bigger. And frankly, our customers live in the middle of that circle. They don't care that we only operate in the 3% of the pie. They have to rationalize the spend all the way around that pie. So rather, in 2009, sticking our head in the sand, we said, "How do we help our customers address this expansive growth in spending in health care? And what can we do as a company to reposition ourself?" So I put this chart up here to give you a bit of the impetus for some of the changes that we have made in the company over the prevailing years. And more of that we'll talk about today.

So back in 2009, as we sat around and said, "How do we reposition the company, very successful company? We don't want to ignore our past but no, we have to change for the future," a couple of the key items that came in our agenda. The first 2 really fall into Lonny Carpenter's world: quality and operational efficiency, highly decentralized company. Multiple plants, multiple quality systems, both internal evaluation and external evaluation via the FDA. So that is not going to carry us forward.

So we quickly started moving towards a more harmonized approach on both quality and manufacturing, culminating this year in January with all of our manufacturing networks around the world, every single manufacturing employee now reporting for the first time into one group President, Lonny Carpenter, previously had been dispersed amongst all of our operating division presidents. So now we have all of the projects aligned under one leader in concert with the other members of the executive leadership team.

The bottom half, acquisitions and capital allocation, really the same thing. What do we do with a balance sheet that in 2007, 2008 really was not leveraged? Very flush with cash. And how do we use that to the benefit of the company for long-term growth and for shareholders? And as many of you who've followed us know, Katherine and I have been commenting now ad nauseum that our priorities for our balance sheet are M&A, dividends and buybacks. We have not aligned on a percentage of free cash flow that's going to go into any one of those categories in the year. What we have said is that ideally, you would look back at us in those categories over a 3-year period and say those allocations made sense. Those allocations made sense based on what was in front of you. You can't time M&A. Certainly, you can do buybacks very quickly if you need to. And once you commit to a dividend, you better be prepared to always fund it because you never want to take that away. So hopefully, as you look at the '08 to '11 period that I'll show you, you see a nice, consistent allocation at each of those 3 categories. And all of those, rolled up together, are part of our repositioning in med tech.

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