Q2 2020 Stryker Corp Earnings Call

KALAMAZOO Jul 31, 2020 (Thomson StreetEvents) -- Edited Transcript of Stryker Corp earnings conference call or presentation Thursday, July 30, 2020 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Glenn S. Boehnlein

Stryker Corporation - VP & CFO

* Kevin A. Lobo

Stryker Corporation - Chairman & CEO

* Preston Wells

Stryker Corporation - VP of IR

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Conference Call Participants

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* David Ryan Lewis

Morgan Stanley, Research Division - MD

* Frederick Allen Wise

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

* Joanne Karen Wuensch

Citigroup Inc., Research Division - MD

* 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 Medical Device Equity Research Analyst

* Matthew Stephan Miksic

Crdit Suisse AG, Research Division - Senior Research Analyst

* Patrick J. Bartoski

Piper Sandler & Co., Research Division - Research Analyst

* Richard S. Newitter

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

* Robert Adam Hopkins

BofA Merrill Lynch, Research Division - MD of Equity Research

* Robert Justin Marcus

JPMorgan Chase & Co, Research Division - Analyst

* Ryan Benjamin Zimmerman

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

Story continues

* 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 Second Quarter 2020 Stryker Earnings Call. My name is Michelle, 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 second quarter earnings call. Joining me today are Glenn Boehnlein, Stryker's CFO; and Preston Wells, Vice President of Investor Relations. For today's call, I'll provide opening comments, followed by Preston with some perspectives on the recovery trends across our diverse businesses. Glenn will then provide additional details regarding our quarterly results before opening the call to Q&A.

As we begin today's call, I would like to start by thanking all our employees for their continued commitment to ensuring the safety of their colleagues, their families and our customers. I am very pleased with the resiliency of our organization, which has maintained high employee engagement and customer connections through the pandemic: from our sales forces, who have remained present and essential to the doctors and caregivers they support; to our manufacturing teams that have worked around the clock to optimize supply with ever-changing demand; and across our workforce, most of whom continue to collaborate virtually. The Stryker spirit remains alive and well.

Our second quarter sales declined organically by 24%, reflecting the impacts of COVID-19 across all geographies and the majority of our product lines. The results reflect progressive improvement in overall sales through the quarter but do vary by region. The sequential improvement can be tied to the initial cancellation and subsequent gradual return of elective procedures during the quarter.

As mentioned in our first quarter call, we took aggressive steps early on to ensure the safety of our employees and customers while managing discretionary spending across our P&L in response to the slowdown in sales. Our cost containment measures included significant reductions in travel and meetings, a slowdown in hiring and salary reductions across senior leaders. In addition, we made other efforts to focus on cash conservation, including the idling of select product lines and facilities across our network starting in May. These actions, combined with our sales performance resulted in adjusted earnings per share of $0.64, a decline of nearly 68% versus the prior year.

As we look at the quarter, the low point in sales occurred in April and then improved sequentially through the end of June. As a reminder, implants and disposables represent about 75% of our sales and small capital represents 16%. Small capital generally mirrors the performance and trends of implants and disposable. The largest improvements within the quarter were in hips, knees, spine, trauma, sports medicine and Neurotechnology, reflecting the resumption of elective procedures and the gradual opening of previously locked down communities and geographies.

With respect to our large capital businesses, medical capital and Mako were standouts, both posting strong growth for the quarter. Our Mako robotic technology remains in high demand with our customers despite any financial constraints resulting from the pandemic. By geography, Japan and Canada performed well, while Europe, China and Australia showed progressive improvement through the quarter. In contrast, Latin America and India continued to be weaker as the impacts of COVID-19 remain more widespread in those regions. In Q3, we expect the recovery to continue, but do not expect it to be linear while local governments deal with varying degrees of resurgences.

Our R&D programs continue to proceed despite logistical challenges caused by the pandemic, and we spent at a healthy rate in the quarter. We are actively engaging with our customers while ensuring that our product supply is in a strong position to capitalize as procedures resume. However, given the fluid nature of the situation, we are not providing Q3 or full year guidance. We are proceeding with the integration efforts regarding the right medical transaction. We are working cooperatively with the regulators to obtain the necessary approvals for the transaction, including, as previously announced, proposing to divest our STAR total ankle replacement product. This process is well underway, and the U.K. Competition and Markets Authority recently announced that it will consider our proposed undertakings in lieu of a Phase II investigation. We continue to expect to close the transaction around the end of Q3 or beginning of Q4.

Please note, beyond this update, we will not be taking any questions regarding Wright Medical or the pending transaction on today's call. This has been the most unique situation that most of us have ever experienced. While we have been impacted financially as a result of the government shutdowns and deferrals of elective procedures, this time has also allowed us opportunities to reevaluate and develop new ways to work and collaborate across our diverse group of businesses. We are prepared to emerge from the pandemic as stronger, more efficient company. I remain confident in our people, our culture and our ability to partner with our customers to meet the needs of the many patients they serve.

And now over to Preston.

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Preston Wells, Stryker Corporation - VP of IR [3]

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Thanks, Kevin. My comments today will focus on providing additional insight into the current environment and how certain countries and products performed during the quarter.

We saw progressive improvement in sales throughout the quarter, with April being the low point. The improving trends were primarily driven by the resumption of elective procedures. That momentum is continuing into Q3 as July is trending better than June. We estimate that approximately 40% to 50% of our total global revenue includes procedures that are considered elective or more accurately can be, in many cases, deferred for a period of time. This primarily includes hips and knees, extremities, spine, sports medicine and our ENT business. Geographically, elective procedure recovery varied depending on the government actions and severity of the pandemic.

In addition to the U.S., countries like China, Australia and Germany have also shown month-to-month improvements as elective procedures returned during the quarter, reaching approximately 85% to 90% of pre-COVID levels. The U.K., India and Latin America lagged during the quarter, at less than 50% of pre-COVID levels, as the pandemic continues to spread in these countries.

During the quarter, we saw strong demand for our large capital products, specifically beds and stretchers within our Medical division and ongoing high demand for our Mako robotic technology. In the second quarter, we were very pleased with the Mako installations in the U.S., including increased sales to ASCs and competitive accounts. We continue to see a growing percentage of both hip and knee replacement surgeries being performed with the Mako robot. As it relates to knees, there is an ongoing shift towards cementless. We also launched a new software upgrade for the Mako Hip program that includes features which improve the overall ease of use. Our leadership in orthopedic robotics, a strong order book, and a solid innovation pipeline positions us well to see continued above-market growth in joint replacement.

While we have made meaningful reductions in many discretionary spend items, our investment in R&D remains robust, as does our healthy cadence of new product introductions. During the first half of the year, we are pleased with the customer feedback and results from several new products, some of which include Spine's (inaudible) system, Mini Frag cleaning in Trauma and Neurovascular Vecta 71 and 74 intermediate catheters. These and other launches will contribute to our performance for the rest of the year and position us well for the future.

Although the COVID-19 pandemic has led to a slowdown in elective procedures, it has also placed increased emphasis on the safety of health care providers and their patients. Over the years, we have built an extensive portfolio within our MedSurg businesses, addressing many of the challenges our customers face, with a focus on accident and infection prevention and caregiver safety. This includes products like our patient hygiene and disinfecting products, personal protective equipment, waste management and smoke evacuation devices along with the LUCAS chest compression system which delivers high-quality automated CPR, while reducing the proximity of the caregiver to the patient.

With the ongoing threat of COVID-19 infections, the Department of Defense identified automated compression devices, such as the LUCAS device, as the best practice for delivery of CPR. Demand for these products grew during the quarter in response to these increased safety concerns. We will continue to leverage our diverse portfolio to address changing trends and meet the expectations of our customers, caregivers and patients.

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

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

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

Our organic sales decline was 24% in the quarter. These results included a decline in the U.S. of 24 -- 27.4% and an international decline of 14.5%. As a reminder, this quarter included the same number of selling days as compared to Q2 2019. Pricing in the quarter was unfavorable 0.2% from the prior year quarter, and foreign currency had an unfavorable 0.8% impact on sales. During the quarter, our growth was significantly negatively impacted by reductions in elective surgeries, the effects of shelter-in-place orders across many geographies and the pause in hospital capital spending as the medical community navigates this pandemic.

Throughout the quarter, we saw progressive improvement in the expansion of elective surgeries across many geographies which resulted in significant variability in our sales. On an overall basis, our sales decline ranged from minus 36% in April to minus 10% in June.

Our adjusted quarterly EPS of $0.64 represents a decline of 67.7% from Q2 2019. The foreign currency impact on second quarter EPS was minimal. Certain other factors resulted in disproportionately negative impacts on EPS, including the loss of higher-margin sales and a loss of leverage related to manufacturing and operational fixed costs. These were partially offset by our strong focus on disciplined cost control within the quarter.

I will now provide some brief comments on segment sales. Orthopaedics had constant currency and organic sales decline of 29.3%. This included a U.S. decline of 28.8%. We saw declines across our hip, knee and trauma businesses. We also saw very strong growth in our Mako business somewhat offset by declines in bone cement. Internationally, Orthopaedics had an organic decline of 30.4%, which reflects the downturn in elective procedures across most geographies.

MedSurg had constant currency decline of 16.4% and an organic sales decline of 17%, which included a 22.2% decline in the U.S.

Instruments had U.S. organic sales decline of 38%, driven by power tools, waste management and SurgiCount. This was partially offset by increases in Instruments' PPE products, namely our Flyte helmet and other protective products. As a reminder, Instruments also had a very high comparable in Q2 2019 with 19% growth.

Endoscopy had U.S. organic sales decline of 34.1%. This reflects a slowdown in its video, general surgery, communications and sports medicine businesses.

The Medical division had U.S. organic growth of 5.4%, reflecting strong demand across its bed and emergency care businesses, resulting from demand tied to COVID-19, which was offset by declines in Sage related to less patient flow.

Internationally, MedSurg had organic sales growth of 4.6%, reflecting strong demand for medical products in Australia, Canada, Europe and emerging markets.

Neurotechnology and Spine had a constant currency decline of 28.9% and an organic decline of 29.9%. Our U.S. Neurotech business posted a constant currency decline of 36.4% and a 37.5% organic decline for the quarter. This reflects a slowdown in procedures in the quarter related to all our Neurotech businesses. The decline was most pronounced in our ENT, neurosurgical and CMF businesses.

Internationally, neurotechnology and spine had an organic decline of 13%, reflecting slowdowns in Europe, Canada and emerging markets, which was offset by a solid performance in our neurovascular business.

Now I will discuss operating metrics in the quarter. Our adjusted gross margin of 57.3% was unfavorable 850 basis points from the prior year quarter. Compared to the prior year, gross margin was unfavorably impacted by fixed cost absorption and business mix. The fixed cost absorption was significant and related to certain costs associated with idle manufacturing that normally would be capitalized into inventory.

During Q2, we operated at 60% of normal capacity and the related unabsorbed costs diluted our margin by approximately 400 basis points. We anticipate Q3 will be at an average capacity of approximately 85%. Unabsorbed costs will continue to impact our margin until our manufacturing is operating at normal levels. Adjusted R&D spending was 7.6% of sales.

Our adjusted SG&A was 37.1% of sales, which was 360 basis points unfavorable to the prior year quarter. Compared to the prior year, SG&A was unfavorably impacted by business mix and deleveraging of selling and marketing costs, partially offset by operating expense savings actions taken during the quarter.

In summary, for the quarter, our adjusted operating margin was 12.5% of sales. The measures we enacted in March, covering most of our discretionary spending, including curtailments in hiring, travel, meetings and consulting as well as the idling of certain manufacturing lines and facilities, including furloughing the related workers continued throughout the second quarter.

Related to other income and expense as compared to prior year quarter, we saw a decline in investment income earned on deposits and interest expense increases related to increases in our debt outstanding. Our second quarter had an adjusted effective tax rate of 14.4%.

Originally posted here:

Edited Transcript of SYK.N earnings conference call or presentation 30-Jul-20 8:30pm GMT - Yahoo Finance