Stryker Corporation

Welcome to the fourth quarter 2018 Striker Earnings Call. My name is Josh, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Following the conference, we will conduct a question and answer session. During that time, participants will have the opportunity to ask one question and one follow-up question. If you would like to ask a question, please press star, then the number one on your touch-tone phone. This conference 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 8K 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.

Welcome to Stryker's fourth quarter earnings call. Joining me today are Glenn Bainline, Stryker's CFO, and Catherine Owen, VP of Strategy and Investor Relations. For today's call, I will provide opening comments, followed by Catherine with an update on MAKO and our recently completed acquisition of K2M. Glenn will then provide additional details regarding our quarterly results before we open the call to Q&A. 2018 was a stellar year for Stryker. Following tough comparisons from a successful 2017, we delivered impressive organic sales growth and leveraged adjusted earnings gains. Our talented team has launched new products, drove sales and marketing execution, and benefited from prior acquisitions that have broadened our portfolios. We delivered organic sales growth of 8.6% in Q4 and grew fully organic sales by nearly 8%. Importantly, this performance reflected broad-based strength across divisions and regions. MedSurg had an excellent Q4, up 10% organically, as the three large divisions, endoscopy, instruments, and medical, grew between 9% and 12%. MedSurg results reflect strong commercial excellence, ability to steadily launch new products, and successfully integrate acquisitions. For example, the physio-control business within medical grew double digits in 2018. In 2019, MedSurge will have a similar flow of new products, and Endoscopy will launch its next generation camera, the 1688, at the end of the first quarter. Neurotechnology and spine increased over 8% organically, as neurovascular, CMF, and interventional spine all registered double digit organic growth. We are excited about the acquisition of K2M, which meaningfully enhances our competitive position in the spine market. Orthopedics posted solid Q4 organic growth of 7%, led by trauma in extremities, knees, increasing momentum in hips, and excellent MACO growth, which Catherine will detail shortly. U.S. trauma in extremities achieved a major milestone, crossing $1 billion in sales for the first time in 2018, resulting from a multi-year period of terrific growth. Geographically, our Q4 growth was balanced as the U.S. was up 8% organically, while international delivered double-digit gains powered by emerging markets and Europe. On a full-year basis, emerging markets grew double digits, and Europe once again grew high single digits. When combined with strong performances in South Pacific, Japan, and Canada, full-year international organic growth was higher than U.S. growth. Our focus on leveraging the strong top line was evident in Q4 as operating margin increased 30 basis points year over year, despite significant deal dilution, including K2M. Meanwhile, we continue to make meaningful investments in our sales forces and R&D to help ensure we maintain our revenue growth going forward. Our teams remain highly focused on executing our cost transformation for growth program, which combined with our top line performance allowed us to deliver EPS at the high end of our targeted range at $2.18 a share, up 11% year over year. Turning to 2019, our organic sales growth is expected to be in the range of 6.5% to 7.5%, representing the highest initial revenue growth guide for Stryker in a decade. Of note, we exited 2018 with a healthy order book for our capital businesses and have a similar mix of headwinds and tailwinds as we had entering last year. While 2019 will largely be an integration year as it relates to K2M, the team is off to an impressive start with notable excitement across our combined selling organizations. And despite sizable deal-related dilution, we fully expect to achieve our target 30 to 50 basis points of annual operating margin expansion. With sales growth once again expected to be at the high end of MedTech and ongoing margin expansion, We are targeting full-year adjusted EPS of $8 to $8.20 a share, a year-over-year increase of 10% to 12%. In closing, I want to thank our sales, marketing, R&D, and support teams around the world for their efforts and results in 2018, enabling us to deliver on our commitment to stakeholders. With that, I will now turn the call over to Catherine.

Thanks, Kevin. My comments today will provide an update on our Q4 acquisition of K2M, as well as our MAKO performance. In November, we completed the acquisition of K2M for roughly $1.4 billion, which significantly bolsters our competitive position in the spinal market. K2M provides Stryker with a highly complementary and innovative product portfolio that is resonating with our customers and spinal sales force. The teams have been focused on optimizing the integration, and we are leveraging our years of deal experience to ensure we are moving quickly to align the organization. We have made considerable progress since closing, including establishing the spine global senior leadership team of the combined organization. We are actively building out the remainder of the organization, which should be completed by the end of the first quarter. Importantly, the sales leadership organizational structure has been announced along with their respective territories. The leadership team is working with the sales teams across the globe to align the sales force with our hybrid selling model, and we expect this to be completed in Q1. Additionally, the cross-selling plan related to the combined product portfolio is in its early stages, and additional cross-selling progress will be made throughout the quarter. We remain on track with our deal model and expect our combined pro forma core spinal revenue to deliver mid-single-digit growth in 2019. We will provide a further update at AAOS as Eric Major, President of Stryker Spine, will be participating in our booth tour and will be available for Q&A. Turning to Mako, we had a particularly strong performance in Q4 with 54 robots installed globally, a record level with over 40% in competitive accounts. Geographically, the US led the way with 36 robots versus 27 in the prior year. Globally, we now have 642 robots installed with 523 in the US, the majority of which have been upgraded to the total knee system. During the quarter, we certified roughly 250 surgeons on the total knee, bringing the total number of surgeons trained since launch to approximately 1,600. There were roughly 24,800 robotic procedures performed in the U.S. during the quarter, with full-year MACO procedures topping 76,900. MACO total knee procedures increased over 35% sequentially to approximately 15,500. with knees representing roughly 60% of all NACO procedures performed in the U.S. in 2018. We also saw continued uptick in utilization rates on the robot, which climbed over 25% sequentially in Q4 and up 30% year over year. The ability to perform a cementless total knee on the robot, which was approved by the FDA in Q4 of 2017, is also helping further drive cementless knee adoption as we exited 2018 with over 30% of our knees now cementless. Combined, we believe these data underscore that MAKO is undoubtedly a powerful marketing tool for hospitals. The continued demand for the robot and steady acceleration in its utilization by surgeons is being driven more by the powerful clinical results and patient benefits. Looking ahead to 2019, we believe we are well-positioned to continue to drive MAKO momentum as we enter the year with a healthy orders pipeline for the robot. During the year, we saw strong peer review evidence that MAKO Total Knee delivers better clinical outcomes for patients and lower 90-day cost of care, which benefits the payers. We expect to continue to build on the clinical data in support of MAKO as we pass the two-year mark from the full commercial launch of our Total Knee application later this quarter. We look to further update you at the booth towards AAOS, which will include MAKO, and also anticipate further clinical data to present it at AUKUS later in 2019. With that, I'll now turn the call over to Glenn.