Q4 2019 Stryker Corp Earnings Call

KALAMAZOO Jan 30, 2020 (Thomson StreetEvents) -- Edited Transcript of Stryker Corp earnings conference call or presentation Tuesday, January 28, 2020 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Glenn S. Boehnlein

Stryker Corporation - VP & CFO

* Katherine A. Owen

Stryker Corporation - VP of Strategy & IR

* Kevin A. Lobo

Stryker Corporation - Chairman & CEO

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Conference Call Participants

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* Andrew William Stafford

Piper Sandler & Co., Research Division - Research Analyst

* Briana Michele Warschun

Jefferies LLC, Research Division - Equity Associate

* Craig William Bijou

Cantor Fitzgerald & Co., Research Division - Research Analyst

* David Ryan Lewis

Morgan Stanley, Research Division - MD

* Frederick Allen Wise

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst

* Joshua Thomas Jennings

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* Kaila Paige Krum

SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst

* Kristen Marie Stewart

Barclays Bank PLC, Research Division - Research Analyst

* Kyle William Rose

Canaccord Genuity Corp., Research Division - Senior Analyst

* Lawrence H. Biegelsen

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Lawrence Soren Keusch

Raymond James & Associates, Inc., Research Division - MD

* Matthew Stephan Miksic

Crdit Suisse AG, Research Division - Senior Research Analyst

* Philip Chickering

Deutsche Bank AG, Research Division - Research Analyst

* Richard S. Newitter

SVB Leerink LLC, Research Division - MD of Medical Supplies & Devices and Senior Research Analyst

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* Robert Adam Hopkins

BofA Merrill Lynch, Research Division - MD of Equity Research

* Robert Justin Marcus

JP Morgan Chase & Co, Research Division - Analyst

* Ryan Benjamin Zimmerman

BTIG, LLC, Research Division - Director & Medical Technology Analyst

* Steven Michael Lichtman

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* Vijay Muniyappa Kumar

Evercore ISI Institutional Equities, Research Division - MD

* Xuyang Li

UBS Investment Bank, Research Division - Equity Research Analyst of Medical Supplies & Devices

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Presentation

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Operator [1]

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Welcome to the fourth Quarter 2019 Stryker Earnings Call. My name is David, and I will be your operator for today's call. (Operator Instructions) This conference call is being recorded for replay purposes.

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 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. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release that is an exhibit to Stryker's current report on Form 8-K filed today with the SEC.

I will now turn the call over to Mr. Kevin Lobo, Chairman and Chief Executive Officer. You may proceed, sir.

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Kevin A. Lobo, Stryker Corporation - Chairman & CEO [2]

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Welcome to Stryker's Fourth Quarter Earnings Call. Joining me today are Glenn Boehnlein, Stryker's CFO; and Katherine Owen, VP of Strategy and Investor Relations. For today's call, I'll provide opening comments, followed by Katherine with an update on Mako. Glenn will then provide additional details regarding our quarterly results before we open the call to Q&A.

We finished 2019 on a particularly strong note, with Q4 organic sales growth of 8% despite notably difficult year-over-year comparisons. This performance helped propel full year organic revenue growth to 8.1%, topping the high end of our most recently raised target of 7.5% to 8%.

2019 marks the seventh consecutive year of delivering accelerating organic sales growth, which has consistently been at the high end of med tech. In 2013 and 2014, we grew in the 5s organically. '15 and '16, we grew in the 6s. And '17 and '18, it was in the 7s. Also, this past year marks our 40th consecutive year of sales growth since Stryker went public in 1979.

The performance in 2019 was balanced across divisions and geographies, reflecting the durability of our business model.

Turning to the results by our 3 segments. Q4 was led by over 12% organic sales growth for Neurotechnology and Spine, with our Neurotechnology businesses growing in the high teens. Orthopaedics posted a 7.3% organic sales increase in the quarter, powered by impressive double-digit growth in Knees. Our Orthopaedics performance continues to reflect meaningful share gains fueled by Mako and our 3D-printed implants. As Katherine will detail in her comments, Q4 delivered the strongest robot quarter since the launch of Mako. We finished the year with a healthy order book, demonstrating the commercial and clinical success of this highly differentiated technology. MedSurg was up roughly 7% organically in the quarter, as Endoscopy led the way, growing 10%. All other divisions achieved mid-single-digit gains despite challenging comparisons. MedSurg continues to be a strong and consistent grower year in and year out.

International organic growth was 7.6% in Q4 and, for the full year, matched the U.S. growth rate of 8.1%. Emerging markets led the way with strong double-digit gains in Q4 and the full year. While it has taken some time, 2019 was an excellent year in emerging markets, and we are well positioned to continue this momentum into the future. Europe once again registered full year organic sales gains in high single digits as we make progress towards achieving similar market share levels as we have in other developed market regions. This performance was well above the market and has significant runway as we continue to drive sales force specialization. Australia and New Zealand also had a strong Q4 across its portfolio.

In the past 7 years, we have strengthened our international businesses and have taken key steps to strengthen category leadership across our portfolio. The pending addition of Wright Medical later in 2020 will address our last meaningful category leadership gap: upper extremities.

We continue to make investments in our sales, marketing and R&D teams around the globe in order to support our goal of consistently growing at the high end of med tech. But with our focus on our Cost Transformation for Growth initiatives, we are also delivering leverage. Op margin expanded roughly 40 basis points in the year, which included absorbing approximately 30 bps of dilution related to acquisitions.

We exited 2019 with nearly $15 billion in global sales and have demonstrated the ability to continue to drive high growth despite our larger size. We have expanded our offering through internal investments and acquisitions and believe we are well positioned to achieve continued success for our customers, employees and shareholders. Looking at 2020, we are on track to continue to achieve strong organic sales growth and leveraged earnings.

In closing, the tremendous efforts of our 40,000 employees around the globe enabled us to once again achieve strong results and deliver on our promise to our customers and patients to make health care better.

With that, I will now turn the call over to Katherine.

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Katherine A. Owen, Stryker Corporation - VP of Strategy & IR [3]

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Thanks, Kevin. My update today will focus on Mako and the key data points that have allowed you to track our success in executing on our orthopaedic robotics strategy. In Q4, we sold 89 Mako robots globally versus 54 in the comparable quarter a year ago. This includes 63 in the U.S. in Q4. Globally, our installed base of robots is approximately 860, with close to 700 in the U.S. In January, we received Japanese approval for the Mako Partial Knee indication, adding to the indications for the Total Knee and Total Hip procedures. We now have 9 Mako robots in Japan and continue to believe this represents a significant market opportunity.

Looking at U.S. procedures. In Q4, Mako procedures increased nearly 50% to 36,600, bringing the full year total to over 114,000. Total Knee procedures posted a roughly 59% increase in Q4 to approximately 24,000, while full year Mako knee procedures increased roughly 66%, topping 75,000.

Demand for Mako is being driven by the myriad of unique benefits of our robotic technology, multiple reconstructive applications and the ability to perform a cementless knee. Mako SmartRobotics have enabled surgeons to achieve a "know more so as to cut less" approach to joint replacement, which is driving improved outcomes for patients. These capabilities are clearly helping to increase robotic utilization rates, which achieved strong double-digit growth, both year-over-year and sequentially. Lastly, it's worth noting that demand for our 3D printed cementless knees continued to climb, exiting the year at over 36% of our U.S. knee procedures. We also continue to see growing demand for the Mako hip application, underscored by over 40% growth in hip procedures on Mako in 2019.

Please note that going forward, we will no longer be providing quarterly Mako results. Since acquiring the company in early 2014, we have provided detailed Mako data for 23 consecutive quarters in order to allow investors to accurately track the performance of this differentiated robotic technology. As we are now 6 years since the acquisition and nearly 5 years since the initial launch of the Total Knee indication, we believe we have validated the strategic rationale and competitive advantage of Mako as witnessed by the roughly 600 basis points of U.S. knee market share that we have gained since 2013.

Going forward, we continue to expect to take meaningful market share in Knees, owing to Mako, along with our differentiated portfolio of knee products, including our 3D-printed implants. We will continue to report on a combined basis both manual and the Mako-implanted knees in our knee line, while robot sales will be reported in other orthopaedics to allow for accurate tracking of our Knee revenue. Looking at 2020, our Mako order book remains robust and supports our expectation for continued share gains in both Hips and Knees.

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

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Glenn S. Boehnlein, Stryker Corporation - VP & CFO [4]

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Thanks, Katherine. Today, I will focus my comments on our fourth quarter financial results and the related drivers. Our detailed financial results have been provided in today's press release.

Our organic sales growth was 8% in the quarter. As a reminder, this quarter included the same number of selling days as Q4 2018. Pricing in the quarter was unfavorable, 0.6% from the prior year, while foreign currency had an unfavorable 0.6% impact on sales. For the quarter, U.S. sales continue to demonstrate strong momentum with organic growth of 8.2%, reflecting solid performance across our portfolio. International sales grew 7.6% organically, which was balanced across our international regions. Organic sales growth for the year was 8.1%, which was slightly above our most recently raised full year guidance of 7.5% to 8%. U.S. international organic growth was also 8.1%. 2019 had one additional selling day compared to 2018. And for the year, price had an unfavorable impact of 0.9% on sales.

Our adjusted quarterly EPS of $2.49 increased 14.2% from the prior year, reflecting strong drop-through on sales growth combined with good operating expense control. Our fourth quarter EPS was negatively impacted by $0.02 from foreign currency, which was in line with our expectations. Our full year EPS was $8.26 with growth of 13%, reflecting strong sales growth and disciplined leverage.

Now I will provide some highlights around our segment performance. Orthopaedics delivered constant currency and organic growth of 7.3%, including organic growth of 7.2% in the U.S., highlighted by U.S. Knee growth of 10.5%. This performance reflects strong demand for our Mako TKA knee platform, 3D-printed products, Trident II hip implants and continued ramping of our T2 Alpha Nailing System. Internationally, Orthopaedics delivered organic growth of 7.6%, which reflects strong performance in Australia, Canada and Europe.

MedSurg continued to have strong growth across all businesses in the quarter with constant currency growth of 7.4% and organic gains of 6.8%, which included an 8% increase in the U.S. Instruments had U.S. organic sales growth of 4.1%, reflecting a strong prior year comparable. Full year U.S. organic growth for Instruments was 10.2%. In the quarter, sales growth was driven by gains in waste management, Steri-Shield and smoke evacuation. Endoscopy delivered U.S. organic sales growth of 15.4%. Endoscopy had strong performances across many product lines, highlighted by double-digit growth in its video products, including the 1688 camera and accessories, insufflator, suction/irrigation and booms and lights businesses. The Medical division had U.S. organic growth of 5.7%, reflecting solid performance in its bed, including services and stretcher businesses. Internationally, MedSurg had organic sales growth of 2.4%, reflecting strong comparables across most geographies.

Neurotechnology and Spine had constant currency growth of 18.2% and organic growth of 12.5% as K2M anniversaried during the quarter. This growth reflects strong performance within our Neurotech product lines. Our U.S. Neurotech business posted organic growth of 16.5% for the quarter driven by strong demand for our hemorrhagic, ischemic stroke and our neuro-powered instruments products, including Sonopet iQ. During the quarter, we continue to be ahead of our K2M cost integration plan and begin to see good momentum related to our sales integration efforts. For the quarter, we delivered an increase in sequential quarterly growth and on a full year pro forma basis delivered low single-digit increase across our combined worldwide Spine business. Internationally, Neurotechnology and Spine had organic growth of 16.6%. This performance was driven by strong demand in Europe and emerging markets.

Now I will focus on operating highlights in the fourth quarter. Our adjusted gross margin of 66.3% was favorably -- was favorable, approximately 60 basis points from the prior year quarter. Compared to the prior year quarter, gross margin expansion was favorably impacted by acquisitions and foreign exchange, which were partially offset by price and business mix. For the full year, our adjusted gross margin of 65.9% was unfavorable, approximately 20 basis points from the prior year. Compared to the prior year, gross margin expansion was favorably impacted by acquisitions, which were offset by price, foreign exchange and business mix.

Adjusted R&D spending was 5.6% of sales, which was 10 basis points lower than prior year quarter. For the full year, adjusted R&D spending was 6.1% of sales. Our adjusted SG&A was 32.3% of sales, which was favorable to the prior year quarter by 10 basis points. For the full year, our adjusted SG&A was 33.5% of sales, which was favorable to the prior year by approximately 40 basis points. For both the quarter and the year, this reflects continued focus on operating expense improvements through our Cost Transformation for Growth program, including key projects focused on indirect purchasing and shared services. This is offset by the negative impact of acquisitions and continued planned investments in other CTG program efforts like our ERP project.

In summary, for the quarter, our adjusted operating margin was 28.3% of sales, which was 80 basis points favorable to the prior year quarter. Our full year operating margin of 26.3% was up 40 basis points favorable from the prior year, delivering on our commitment of 30 to 50 basis points op margin expansion. Our operating margin primarily reflects good leverage and continued operational savings offset by investments and acquisitions, the latter of which had approximately 30 basis points negative impact for the year.

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