Stryker Corporation

Welcome to the first quarter 2020 Stryker earnings call. My name is Christine and I'll 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 one on your touchtone phone. This conference is being recorded for replay purposes. Before we begin, I would like to remind you that the discussions during this conference 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 would now like to turn the call over to Mr. Kevin Lobo, Chairman and Chief Executive Officer. You may proceed, sir.

Welcome to Stryker's first quarter earnings call. Joining me today are Glenn Bainline, Stryker CFO, and Catherine Owen, VP of Strategy and Investor Relations. For today's call, I'll provide opening comments, followed by Catherine with some perspectives on our mix of deferrable and capital businesses. Glenn will then provide additional details regarding our quarterly results and liquidity position before we open the call to Q&A. As you know, Catherine will be shifting out of her role on June 1st, so this will be her last striker earnings call. While this is not quite the finish she had in mind at the end of February, I did want to take a moment to express my gratitude for her outstanding work the past 13 years. She has been a great help to me and the management team of Stryker. Also, if you include her time covering Stryker as a sell side analyst, this will be her 97th Stryker earnings call. She has seen a lot, but nothing quite like what we are going through right now. On today's call, we will review our first quarter results and provide additional details regarding the impact of COVID-19 on our businesses in March and into the second quarter. And we will also highlight many initiatives underway to ensure we maintain a strong cash position through stringent cost controls to manage through this unprecedented environment. For Q1, we achieved organic sales growth of 2.4%, reflecting strong momentum through the first two months of the quarter and into March, followed by a marked slowdown tied principally to a deferral in elective procedures. We took a number of steps in March to aggressively limit travel to ensure the safety of our employees and customers while ensuring our essential personnel were available to support healthcare workers around the world. These efforts, along with other cost controls, helped to mitigate some of the impact on earnings from the slowdown in sales, resulting in adjusted per share earnings of $1.84, a decline of 2% versus the prior year. The sales drop became more pronounced towards the end of March, and in the last week of the month, our company sales declined 30% versus the prior year. The biggest declines were in hips, knees, spine, and endoscopy, offset by our other businesses. By geography, Japan, Canada, and smaller countries in Europe and emerging markets performed well, while China was clearly the weakest. In Q2, we expect a recovery in China, but most other geographies will get worse given the spread of the virus. For the month of April, our company sales will decline by 35% to 40% versus 2019. Looking at the remainder of the quarter, we are encouraged by the planned, gradual resumption of elective surgeries in the US and abroad. Portfolio products are being impacted by COVID-19 in numerous ways. Clearly, we are seeing a deferral in elective procedures, particularly within our orthopedics and spine businesses. We fully expect, given the chronic and progressive nature of the conditions impacting these patients, that the vast majority of them will be treated in the coming months. recognizing that the exact timing of a broad resumption of elective procedures is too fluid to predict. And as hospital needs to treat COVID-19 patients escalated sharply in March and into April, we saw a significant increase in the demand of products across our roughly $2 billion medical portfolio, which Catherine will discuss in more detail. In response, our manufacturing teams have been aggressively ramping capacity of much needed products while also ensuring we scale back other plants where demand has been negatively impacted. Overall, given our mix of businesses and the cost control initiatives underway, coupled with our strong balance sheet, we believe we are well positioned to manage through this slowdown. Given the fluid nature of the current situation, we are not providing Q2 or full year guidance. However, we expect to maintain the cost control efforts for most of 2020. We are also setting ourselves up to respond quickly as customer demands return. We are providing financial assistance to hold our sales forces in place and continue to invest in our pipeline of new products. We are proceeding with integration efforts regarding Wright Medical, and given the impact of the virus on competitive hiring, we are expecting a minimal level of sales force attrition. As was publicly announced, Wright held its shareholder meeting on Friday, April 24th, and the deal was approved. This reduced the tender threshold from 95% to 80%. The tender offer was extended until June 30th, which is customary as we continue to work through the closing conditions. We expect to close around the end of Q3 2020. Please note, beyond this update, we have no new information to share with you regarding Wright Medical, and we will not be taking any questions on this pending acquisition during today's call. Before I turn the call over to Catherine, I would like to take a moment to thank all of our employees around the globe for their commitment to ensuring the safety of their colleagues, their families, and our customers. Our sales forces across our businesses, who are essential to supporting doctors and caregivers, have demonstrated unwavering commitment during this pandemic. Our manufacturing teams have worked tirelessly to optimize the plant network and to ramp capacity where needed. and we have created rapid innovations in response to the pandemic. We will continue to support our employees and our customers as they work to meet the needs of the many patients that will need treatment. While our many-year growth momentum has been temporarily derailed, the Stryker spirit is alive and well, and we remain poised to capitalize as the situation improves. And now, over to Catherine.

Thanks, Kevin. My update today will focus on providing greater granularity around our mix of businesses that are particularly impacted by the COVID-19 virus. Overall, we estimate that 40 to 50% of our total global revenue include procedures that are considered elective, or more accurately, can be in many cases deferred for a period of time. This includes primarily our orthopedic businesses, including hips and knees, extremities, as well as spine and neurotex ENT. There are also procedures within our endoscopy portfolio that can be deferred, including some of the scoping procedures and sports medicine. Additionally, with many states and countries having implemented or recently come out of stay-at-home orders, we have seen a slowdown in trauma. This can be attributed to fewer people out driving, a slowdown in construction, and general decline in overall activity that traditionally drives trauma procedures. Unlike truly elective procedures, the patients deferring surgeries addressed by our products will not improve with time. Rather, their underlying conditions generally continue to deteriorate. So while the exact timing of the resumption of elective procedures to more normalized levels is difficult to predict at this point in time, we do anticipate the vast majority of patients treated by our products will return. We also assume the resumption of procedures will continue to vary by country, state, and municipality as they increasingly move past the peak impact of the virus. In contrast to the impact we are seeing from deferred surgeries, other parts of our portfolio are experiencing significantly heightened demand, as Kevin noted. This is most noteworthy for our medical business, which had sales of roughly 2.3 billion in 2019, or approximately 15% of total striker revenue, and is comprised primarily of capital equipment. It's important to recognize that our capital equipment portfolio, which represented about 25% of our total sales in 2019, includes both large capital and small capital at about 9% and 16% respectively. Our large capital equipment offering includes Mako, beds and stretchers within medical, Endoscopy's communication portfolio, and Spine's enabling technology, which includes Mobius and Navigation. Turning to smaller capital equipment, this bucket includes medical emergency costs and defibrillators, endoscopy cameras, instruments, power tools, and waste management, and neuro-powered instruments that are reported within neurotechnology. Of note, small capital is typically used in the OR and as such tracks more closely to growth in procedures. Against that backdrop, we are seeing strong demand across essentially the entirety of the medical offering, including beds and stretchers, physio, emergency costs, and SAGE. We are also seeing meaningful increase in demand for instruments like personal protection offering, which is included in their base product portfolio within surgical technologies. Across the board, we have ramped capacity to meet the current demand and what we anticipate will be ongoing demand as hospitals look to better position their capacity and stockpiles going forward. In late March, we developed the Stryker Emergency Relief Bed, which helps emergency responders manage patients efficiently during this critical time. We started manufacturing this low-cost bed at the end of March, which broadens our medical offering beyond ICU and med-surg beds to better meet customer needs. Other efforts to assist with responding to COVID-19 include the production of face shields for healthcare professionals and a new patient protective covering product, which attaches to our ambulance structures. Overall, while the slowdown in elective procedures has and will continue to impact our top line, we are able to leverage our unique product portfolio and offset part of that impact through demand for our medical and instruments offering. We expect this trend will continue into Q2 with an ongoing gradual increase in elective procedures. With that, I will now turn the call over to Glenn.