Stryker Corporation (NYSE:SYK) Q2 2023 Earnings Call Transcript

Stryker Corporation (NYSE:SYK) Q2 2023 Earnings Call Transcript August 3, 2023

Stryker Corporation beats earnings expectations. Reported EPS is $2.54, expectations were $2.38.

Operator: Welcome to the Second Quarter 2023 Stryker Earnings Call. My name is Todd 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. 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, Chair and Chief Executive Officer. You may proceed, sir.

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Kevin Lobo: Welcome to Stryker’s second quarter earnings call. Joining me today are Glenn Boehnlein, Stryker’s CFO; and Jason Beach, Vice President of Investor Relations. For today’s call, I’ll provide opening comments, followed by Jason with the trends we saw during the quarter and some other updates. Glenn will then provide additional details regarding our quarterly results before opening the call to Q&A. In the second quarter, we delivered organic sales growth of 11.9% with double-digit growth in both MedSurg and Neurotechnology, and Orthopaedics and Spine. This comprehensive performance demonstrates the diverse and attractive markets that we play in and our ability to drive growth through strong commercial execution.

We are also pleased with the continued positive outcomes of our globalization efforts. Our international business demonstrated strong performance with double-digit growth, complementing our strong and fast-growing U.S. business. In addition, we continue to see traction with our pricing initiatives, again delivering positive pricing in the second quarter. During the quarter, we continued to realize improvements in component availability, although disruptions remain in parts of our business. Our teams have demonstrated good agility in addressing these situations, proactively mitigating much of their impact. We delivered quarterly adjusted EPS of $2.54 a share, reflecting 13% growth compared to the second quarter of 2022. This result was primarily driven from the strength of our sales but also marks the beginning of our margin recovery.

We expect margins to continue to expand throughout the remainder of the year. Finally, with half the year behind us and our solid momentum, we have increased our expected full year organic sales growth to a range of 9.5% to 10.5% and increased our expected earnings per share to $10.25 to $10.45 per share. I will now turn the call over to Jason.

Jason Beach: Thanks, Kevin. My comments today will focus on providing an update on the current environment as well as capital demand, including Mako, acquisitions and an update on product launches. Procedural volumes have largely recovered to pre-COVID levels in most countries. And while volumes are strong, patient backlog still remains, and we believe the elevated orthopedic procedural demand will continue well into 2024. While volumes have largely recovered, hospital staffing pressures and supply constraints continue in pockets around the globe. These challenges are resolving gradually as we expected and will continue to be a moderate tailwind as we move through the second half of 2023 and into 2024. Additionally, demand for our capital products remained healthy in the quarter as evidenced from the double-digit organic growth of our Medical, Instruments and Neuro Cranial divisions.

Also, demand for Mako remains robust with strong U.S. and international performances, which is helping drive our continued growth in hips and knees. Next, capital order backlog remains elevated, well above normal levels. Also, during the quarter, we executed a small tuck-in deal and also closed on the Cerus Endovascular acquisition. Furthermore, our product super cycle continues to drive positive momentum. In late Q2, we successfully completed a limited launch of our 1788 camera platform and are poised for full launch in Q3. We also received FDA clearance for Cranial Guidance, our newest application under our Q Guidance platform. This empowers surgeons to quickly plan a safe surgical approach using multiple imaging modalities and then navigate instruments with specific surgical procedures.

Finally, we remain on track for the launch of our LIFEPAK 35 defibrillator outside of the U.S. in the fourth quarter of this year and in the U.S. in early 2024. These launches will continue to support growth over multiple years. With that, I’ll now turn the call over to Glenn.

Glenn Boehnlein: Thanks, Jason. Today, I will focus my comments on our second quarter financial results and the related drivers. Our detailed financial results have been provided in today’s press release. Our organic sales growth was 11.9% in the quarter. The second quarter’s average selling days were in line with 2022. The impact from pricing in the quarter was favorable by 0.5%. We continue to see a positive trend from our pricing initiatives, particularly in our U.S. MedSurg and Neurotech businesses, all of which contributed positive pricing for the quarter. Foreign currency had a 0.7% unfavorable impact on sales. In the quarter, U.S. organic sales growth was 12%, International organic sales growth was 11.4%, impacted by positive sales momentum across most of our international markets, particularly Australia, Canada, Europe and most of our emerging markets.

Adjusted EPS of $2.54 in the quarter was up 12.9% from 2022, driven by higher sales and operating margin expansion, partially offset by a higher adjusted income tax rate and the impact of foreign currency exchange, which was unfavorable $0.03. Now, I will provide some highlights around our quarterly segment performance. In the quarter, MedSurg and Neurotechnology has both constant currency and organic sales growth of 12.9%, which included 13.5% of U.S. organic growth and 10.9% of international organic growth. Instruments had U.S. organic sales growth of 12.9%, led by strong double-digit growth in the Surgical Technology business. From a product perspective, sales growth was led by power tools, waste management, smoke evacuation and surge account.

Endoscopy had U.S. organic sales growth of 3.5% against a strong comparable. This included strong growth in its ProCare sustainability and sports medicine businesses. The Endoscopy business completed its limited launch of the 1788 camera late in the second quarter. Consistent with prior camera launches and the related transition period between the legacy camera and the new camera, this also contributed to muted growth in Q2. Medical had U.S. organic sales growth of 27.2%, reflecting very strong performances in all three of its businesses, acute care, emergency care and Sage, and benefited from continued improvement in product supply during the quarter. Neurovascular had U.S. organic sales growth of 9%, reflecting a strong performance in our hemorrhagic business.

Neuro Cranial had U.S. organic sales growth of 9.6%, which included double-digit growth in our Bone Mill, bipolar forceps and Max Space product lines. Internationally, MedSurg and Neurotechnology had organic sales growth of 10.9%, reflecting double-digit growth in our medical and Neuro Cranial businesses. Geographically, this included strong performances in Europe, Australia and Canada. Neurovascular’s growth continues to be negatively impacted by VBP in China. Orthopaedics and Spine had both constant currency and organic sales growth of 10.6%, which included organic growth of 10% in the U.S. and 12.1% internationally. Our U.S. Knee business grew 10.6% organically, which reflects our market-leading position in robotic-assisted knee procedures.

Our U.S. Hip business grew 8.8% organically, reflecting strong primary hip growth fueled by our Insignia hip stem and continued procedural growth. Our U.S. Trauma and Extremities business grew 14.3% organically with strong performances across all businesses led by very strong growth in upper extremities and foot and ankle. Our U.S. Spine business grew 5.2%, led by the performance of our enabling technology and Interventional Spine businesses, including the recently launched Q Guidance Navigation System. Our U.S. Other Ortho declined organically 1.6%, primarily driven by the impact of deal mix changes, specifically more rentals related to Mako installations in the quarter. Internationally, Orthopaedics and Spine grew 12.1% organically, including strong performances in Australia, Canada and most emerging markets.

Now, I will focus on operating highlights in the quarter. Our adjusted gross margin of 63.9% was favorable, approximately 60 basis points from the second quarter of 2022 and 70 basis points sequentially compared to Q1 2023. This change was primarily driven by the slight easing of certain cost pressures, decreases in spot buy purchases, improved productivity and the benefit of price, partially offset by the impact of foreign currency exchange. Adjusted R&D spending was 6.4% of sales, which represents an 80 basis points decrease from the second quarter of 2022, due primarily to a higher comparable in 2022 related to the ramping of costs for product launches. Our adjusted SG&A was 33.1% of sales, which was 70 basis points higher than the second quarter of 2022, due to a disciplined ramp of spend and investment to support our growth.

We expect our full year SG&A as a percent of sales to be in line with 2019 levels as we continue to invest for growth. In summary, for the quarter, our adjusted operating margin was 24.3% of sales which was approximately 60 basis points favorable to the second quarter of 2022. This performance is primarily driven by the aforementioned easing of certain cost pressures, primarily on gross margin. Adjusted other income and expense of $66 million for the quarter was slightly higher than 2022, driven by increased interest expense. The second quarter of 2023 had an adjusted effective tax rate of 15.2%, reflecting the impact of geographic mix and certain discrete tax items. For 2023, we reiterate our full year effective tax rate guidance to be in the range of 14% to 15%.

Focusing on the balance sheet. We ended the second quarter with $1.5 billion of cash and marketable securities and total debt of $12.9 billion. Approximately $100 million of the term loan debt was paid down in the quarter, reflecting year-to-date payments of $200 million and a remaining balance of $650 million. Turning to cash flow. Our year-to-date cash from operations is $1.1 billion. This performance reflects the results of net earnings and higher accounts receivable collections. Considering our year-to-date results, our strong backlog for capital equipment and continued positive procedural trends, we now expect full year 2023 organic sales growth to be in the range of 9.5% to 10.5% with pricing to be slightly positive for the year. If foreign currency exchange rates hold near current levels, we anticipate sales will be unfavorably impacted by approximately 0.3% and adjusted EPS will be unfavorably impacted from $0.05 to $0.10 per share for the full year, both of which are included in our guidance.

Based on our performance in the first half of the year, together with our strong sales momentum, we now expect adjusted earnings per share to be in the range of $10.25 to $10.45 per share. And now I will open up the call for Q&A.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Robbie Marcus with JPMorgan. Please go ahead.

Robbie Marcus: Congrats on a great quarter here. Two for me. First, a great quarter. It looks like you’re raising more than the beat on both the top and bottom line. Looks like you’re taking a good amount of share still in Ortho across hips, knees and extremities, trauma. Just as we think about the balance of the year, you touched on some of them, but would love to get a sense of what gives you the confidence these elevated trends are going to continue. And any visibility on the margin side that gets you comfortable moving it up more than the beat?

Kevin Lobo: Hi Robbie, it’s Kevin. I’ll start off with sort of the confidence in the procedures. We’ve talked about this since the third quarter of last year, a good sense based on surgery backlogs, talking to physicians and seeing that there was pent-up demand through the pandemic. So, we expected elevated procedures coming into the year. That has certainly played out. You’ve heard even similar comments from some of the providers in the space. And these surgery backlogs are long — they longer, probably a two-month surgery backlog is more like four months. And so that gives us confidence that through the end of this year and into next year that we’re going to continue to see elevated procedural growth. And we also see that in the demand for our small capital, which again, there’s equipment that’s used for ongoing procedures. And then, I’ll turn to Glenn for margins.

Glenn Boehnlein: Yes. Hey Robbie. As we got through the quarter, as I mentioned, we really started to see some positive and easing of some of the cost pressures that we had felt in Q1 and certainly last year. I think we also are starting to feel some of the improvements in supply chain. That’s not to say that everything is rosy. We are still feeling inflationary pressures in transportation, some of our commodities, labor, certain electronics. But I will say that spot buys in Q1, spot buys in Q2 have not been material. And we’re getting near the amortization of the impact of spot buys from last year. So I feel like that gives me good confidence that I think we’ll see continued improvement in our gross margin as we move into Q3 and Q4. And so, we really will feel that gradual improvement, and we’ll feel it all the way down to the op margin line.

Robbie Marcus: Great. And maybe just a follow-up for me for both of you or however you want to take it. People are really happy so far with the year, but unfortunately, we’re always focused on the future and looking out to next year already. You talked about, Kevin, these trends continuing. You have the super cycle in MedSurg. Just any kind of thoughts on how we should think about these elevated trends continuing and thoughts? I know you’re laser-focused on getting back to your 2016 — or 2019 operating margin of 26.3%. How do we think about how far out that might be?

Kevin Lobo: Well, I think Jason’s comments in the openings say we do expect the procedural positive trends to continue well into next year. I don’t have a crystal ball exactly, will that be 100 basis points or 200 basis points more elevated than it was back through the pandemic in last year. So — but we expect that to be elevated. The super cycle of products is widely exciting, something like — look at Neptune S is off to a great start within instruments, the 1788 [ph] is only going to start kind of the latter part of this quarter. So, that’s going to b a big impact next year, got a new defibrillator coming that’s more next. So, these are launches, ProCuity is multiple year. We have the stair chair of the Xpedition.

Amazing product that medical launch brand new and it’s new category altogether that launched Q1 of this year, that will continue into next year. So, a lot of continuation of really strong growth across our businesses. So, you should expect what — going to continue to be a high-growth company going into next year. Yes. Let me just — sorry, let me finish. I forgot it was a long question. So yes, we are absolutely committed to returning to pre-COVID margins and then growing our margins thereafter. This quarter marked a really important step, a very big first step in that evolution.