Stryker Corporation

Welcome to the third quarter 2021 Stryker earnings call. My name is Maddie and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Following the conference, you will conduct a question, 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'd 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 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, during the discussions will include a certain non-GAAP financial measures. Re-consultations to the most directly comparable gap 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 begin, sir.

Thank you. Welcome to Stryker's third 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 will provide opening comments, followed by Preston with an update on the trends we saw during the quarter. Glenn will then provide additional details regarding our quarterly results before opening the call to Q&A. For the quarter, we posted organic sales growth of 8.4% versus 2019, driven by excellent double-digit growth from our med-surg and neurotechnology businesses. But this was offset by softer sales of hips, knees, and spine due to the resurgence of COVID-19. The slowdown in deferrable procedures primarily impacted the US and worsened through the quarter. While our implant businesses were challenged, we saw strong results for our Mako robotic technology and capital products across our med-surg portfolio. In addition, We had strong performances from our more emergent businesses, including our core trauma business and another standout performance by Neurovascular. International organic growth of 12%, again, outpaced growth in the US, representing robust performances and lessening impacts of COVID-19 across most major geographies, including strong results across Europe, Australia, Canada, and emerging markets. Our year-to-date organic growth is 7.6% and with the continued uncertainty related to COVID recovery, as well as healthcare staffing shortages, we are updating our full year organic sales growth guidance to 7-8% compared to 2019. Our capital equipment order book remains strong and we are well positioned for the eventual procedure recovery. Our adjusted EPS grew 15% versus 2019, and we continued our focus on driving cash flow, leading to a year-to-date cash conversion of 87%. The EPS growth, although solid, was lower than our expectations and is reflected in our updated guidance, which Glenn will elaborate on. Meanwhile, we are pleased with our cash flow performance, which provides us with additional flexibility for future M&A opportunities. While the quarter did not progress as we had anticipated due to the Delta variant, we remain confident in the outlook for our businesses, as evidenced by our strong international med-surg and neurotechnology performances. We expect these businesses to continue to perform at high levels, with the uncertainty most concentrated in deferrable procedures in the United States. We continue to feel bullish about our longer-term prospects as the pandemic recedes with our proven strategy and strong fundamentals. We are excited to share more with you at our upcoming analyst day on November 18th. I will now turn the call over to Preston.

Thanks, Kevin. My comments today will focus on providing additional insights into the current environment, including how certain products and geographies perform during the quarter. In addition, I will provide an update on the continued integration of Wright Medical, including the performance of our combined trauma and extremities business. During the quarter, significant spikes of the COVID Delta variant drove increased infections and hospitalizations that required higher hospital bed utilization, which ultimately led to the deferral of elective procedures. In addition to increased hospitalizations, hospital staffing shortages also pressured procedural volumes throughout the quarter. This primarily impacted our implant-related businesses, including hips, knees, and spine, which can be in many cases deferred for a period of time. However, the disease states that we treat are degenerative, and the patients that deferred their procedures will eventually return to have those procedures completed. The impact on elective procedures was more pronounced in the United States than on other geographies outside the United States. Within the United States, there were areas of disruption in most states, but disruption was more widespread in the southeast and southwest portions of the country, impacting major markets like Florida and Texas throughout the quarter. Other markets around the world, including China, Japan, and Australia, experienced intermittent lockdowns throughout the quarter, which also drove uneven results across our implant-related businesses in those markets. During the quarter, Europe, which was more impacted by COVID in previous quarters, had impressive organic growth compared to 2019. COVID-related hospitalizations in the United States began to trend upwards towards the end of July and then progressively worsened, peaking at the beginning of September. At the end of the quarter, infection and hospitalization rates were declining in impacted regions and have continued into October. As a result, we are beginning to see some improvements in our more impacted businesses through the first few weeks of October. However, we expect the recovery will be partially muted by the continued hospital staffing challenges and ongoing COVID-related volatility. Our assumption for the fourth quarter is that deferrable procedures will gradually return starting with a low base in October before returning to more normal levels by the end of the quarter. As a result, we expect that the fourth quarter growth rates for our more deferrable businesses will be similar to the third quarter. Despite the ongoing challenges with elective procedures, we had a strong performances in our more emergent businesses like neurovascular. which grew strong double digits compared to 2019 as a result of continued market expansion and ongoing global demand for our innovative technology. In addition, demand for our capital equipment remains healthy as evidenced by our continued strong sales performance and robust order book for small and large capital products, including our surgical technologies, emergency care, and neurosurgical businesses. The ongoing strength in capital is also reflected in the continued demand for our Mako robotic technology. Our industry-leading Mako robot continues to help surgeons improve patient outcomes by knowing more and cutting less. This trend across capital is expected to continue as hospitals take advantage of flexible financing and prioritize capital products like those within our portfolio that are critical to providing emergency care, driving profitable procedures, and ensuring safe working environments for caregivers and patients. turning to the right medical integration, which continues to progress in all regions and functions. The United States commercial integration has moved past the Salesforce realignment and is now focused on continued business process improvement and system efficiencies. The teams have also developed long-term product pipeline strategies. Outside the United States, we continue to work through integration activities, including Salesforce and indirect channel alignment across all key geographic regions. Overall, we remain pleased with the progress and the pace of integration over the past year. Including Wright Medical, the combined US trauma and extremities business has grown 8.1% year to date. The year to date growth in the United States has been driven by strong double digit growth in both our core trauma and upper extremities businesses, reflecting the execution of the sales integration in the United States. Outside the United States, sales have declined 3.8% year to date driven by timing of distributor conversions in Latin America and Asia Pacific, and declines in our legacy trust and trauma business in China as a result of the provincial tendering process. Considering the latest results, ongoing COVID-related volatility, and the provincial tenders in China, we now expect our combined trauma and extremities business to grow mid-single digits for the full year. With that, I will now turn the call over to Glenn.