Stryker Corporation

Welcome to the second quarter 2020 Striker Earnings Call. My name is Michelle, 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 1 on your touch-tone phone. 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 in today's press release that is an exhibit to Stryker's current report on Form 8-K, filled today with the SEC. I will now turn the call over to Mr. Kevin Alobo, Chairman and Chief Executive Officer. You may proceed, sir.

Welcome to Stryker's second quarter earnings call. Joining me today are Glenn Bainline, 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 striker 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 64 cents 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 disposables. The largest improvements within the quarter were in hips, knees, spine trauma, sports medicine, and neurotechnology, reflecting the resumption of electric 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 to 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 continue 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 UK Competition and Markets Authority recently announced that it will consider our proposed undertakings in lieu of a Phase 2 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 Right 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 a 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.

Thanks, Kevin. My comments today will focus on providing additional insights into the current environment and how certain countries and products perform 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 UK, India, and Latin America lagged during the quarter at less than 50% of pre-COVID levels as the pandemic continued 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 make-over-buy technology. In the second quarter, we were very pleased with the MAKO installations in the U.S., including increased sales to ASDs and competitive accounts. We continue to see a growing percentage of both hip and knee replacement surgeries being performed with a MAKO robot. As it relates to knees, there's an ongoing shift towards the metals. We also launched a new software upgrade for the MAKO hip program that includes features which improve the overall ease of use. Our leadership and 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 Niagara Lateral System, MiniFrag Platinum and Trauma, and Neurovascular's VECTA71 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 healthcare providers and their patients. Over the years, we have built an extensive portfolio within our med-surg 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 a 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 a 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.