Stryker Corporation (NYSE:SYK) Q4 2023 Earnings Call Transcript

Stryker Corporation (NYSE:SYK) Q4 2023 Earnings Call Transcript January 30, 2024

Stryker Corporation beats earnings expectations. Reported EPS is $3.46, expectations were $3.27. Stryker Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to the Fourth Quarter and Full Year 2023 Stryker Earnings Call. My name is Luke, 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. This conference call is being recorded for replay purposes. Before we begin, I’d like to remind you that 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’d now like to turn the call over to Mr. Kevin Lobo, Chair and Chief Executive Officer. You may proceed, sir.

Kevin Lobo: Welcome to Stryker’s fourth 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, MAKO performance insights and updates on recent acquisitions. Glenn will then provide additional details regarding our quarterly results and 2024 guidance before opening the call to Q&A. First, I want to recognize and celebrate our achievement of surpassing $20 billion in sales. We continue to be a high-growth company with a focus on our mission to deliver for our patients and customers. As we begin 2024, I am very excited about our future. We are in a strong position with robust demand across both procedures and capital, easing macro constraints and a strong pipeline of innovation.

I want to thank our over 50,000 employees for their unrelenting determination, agility and performance. We’ve delivered terrific sales growth of over 11% in Q4 and the full year despite strong comparatives from the prior year. Our commercial execution, including many successful product introductions was excellent across our businesses and regions. Globally, for both Q4 and the full year, we had double-digit organic sales growth in instruments, endoscopy, medical, neuro cranial, hips, knees and trauma and extremities. For the full year, we also had double-digit organic sales growth both in the U.S. and internationally. Spine and neurovascular also demonstrated good performances while making notable advancements in future innovations and acquisitions.

It was a comprehensive performance across our businesses, and we have built significant momentum entering 2024. For the sixth straight year, our international sales growth, excluding China VBP outpaced our strong U.S. business. Canada, Australia and most emerging markets had double-digit growth, while Europe and Japan grew in high single digits. International continues to be a large growth opportunity for us. Next, we delivered quarterly and full year adjusted EPS of $3.46 and $10.60, respectively, which represents 15% growth for Q4 and 13% growth compared to the full year of 2022. This was driven by our strong sales, but also demonstrates our continued operating margin recovery. We remain focused on driving high growth now and in the future through investments in organic innovation and M&A.

We expect to continue to deliver sales growth at the high end of medtech, which is reflected in our full year 2024 guidance of organic sales growth of 7.5% to 9%. This growth, combined with an accelerated margin expansion plan, translates to an adjusted EPS of $11.70 to $12 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 MAKO, Vocera and our recently announced agreement to acquire SERF. During the quarter, we saw strong procedural demand. We continue to expect the ortho markets will remain strong in 2024, driven by continued adoption in robotic-assisted surgery, demographics, a more favorable pricing environment and healthy patient activity levels with surgeons. While supply constraints continue in pockets around the globe, our supply is stable overall and gradually improving. Additionally, demand for our capital products remained very robust in the quarter with double-digit organic growth in medical, instruments and endoscopy.

Hospital CapEx budgets remain healthy, and our capital order book remains elevated as we enter 2024. Next, specific to MAKO, we had a record quarter of installations globally. The progress of our MAKO offense, including our recent direct-to-consumer campaign, has resulted in strong growth of our installed base alongside continued increases in utilization. In the U.S., we saw 60% of knees and 34% of hips performed using MAKO as we exited the year. Globally, we exited the year with just over 40% of knees and nearing 20% of hips performed using MAKO. We have momentum, and a significant opportunity remains as MAKO adoption increases. We are nearing the two-year anniversary of our Vocera acquisition and remain very excited about the acquired assets, as it provides a platform for us to be at the intersection of medical devices, software and clinical support.

With integration activities now complete, which included a migration towards the cloud as well as the commercial reorganization, we are pleased with the accelerating double-digit sales and order growth achieved as we exited the year. In 2023, we saw many cross-sell wins, including new bed business leveraging Vocera. Also, we completed the seamless experience created between the Vocera platform and both ProCuity and our new wireless structure. This year and beyond will bring even more integrations and enhancements with a focus on scalability, user experience, automated workflow and documentation. We expect strong double-digit annual sales growth to continue for years to come, and we are excited to have Vocera as part of the Stryker family. Lastly, we are progressing with our recently announced agreement to acquire SERF, and we expect the deal will close this quarter.

With that, I will now turn the call over to Glenn.

Glenn Boehnlein: Thanks, Jason. Today, I will focus my comments on our fourth quarter financial results and the related drivers. Our detailed financial results have been provided in today’s press release. Our organic sales growth was 11.4% in the quarter, compared to 13.2% organic growth in the fourth quarter of 2022. The fourth quarter of 2023 has the same number of selling days as 2022. The impact from pricing in the quarter was favorable by 0.7%. We continue to see a positive trend from our pricing initiatives, particularly in our MedSurg and Neurotech businesses, all of which contributed positive pricing for the quarter. Foreign currency had a 0.3% favorable impact on sales in the quarter. In the quarter, U.S. organic sales growth was 12.7%.

International organic sales growth was 7.7%, against a very strong comparable of over 18% in 2022. This performance included positive sales momentum across most of our international markets, particularly Australia, Canada, Japan and most emerging markets. For the year, organic sales growth was 11.5%, with U.S. organic sales growth of 11.7% and international organic sales growth of 10.9%. Excluding the impact of China VBP, international growth was 12.8%. The impact for pricing in the year was favorable 0.6%. Foreign currency had a 0.5% unfavorable impact, and 2023 as the same number of selling days as 2022. Our adjusted EPS of $3.46 in the quarter was up 15.3% from 2022, driven by higher sales and operating margin expansion, as well as lower other income and expenses.

Foreign currency exchange translation had a favorable impact of $0.02. Our full year adjusted EPS was $10.60, which represents growth of 13.5% from full year 2022, reflecting the favorable impact of sales growth and operating margin expansion, partially offset by the unfavorable impact of foreign currency exchange translation of $0.10. Now I will provide some highlights around our quarterly segment performance. In the quarter, MedSurg and Neurotechnology had constant currency sales growth of 12% and organic sales growth of 11.8%, which included 13.8% of U.S. organic growth and 5.7% of international growth. Instruments had U.S. organic sales growth of 11.5%, with strong double-digit growth across its Surgical Technology and Orthopedic Instruments businesses.

From a product perspective, sales growth was led by power tools, SteriShield, smoke evacuation and surg account. Endoscopy had U.S. organic sales growth of 17.9%, with double-digit growth in its Communications, Endo, BEU and Sports Medicine businesses. From a product perspective, this includes strong growth in booms, lights and video. During the quarter, the Endoscopy business continued to see very strong momentum of the 1788 camera system, which had its full launch in September. Medical had U.S. organic sales growth of 12.9%, led by performances in its Vocera, Acute Care and Sage businesses. This included strong growth in Vocera badges, beds, stretchers and Prevalon repositioning products. All of this was against a very strong comparable growth of over 20% in 2022.

Neurovascular had U.S. organic sales growth of 7.6%, reflecting solid performance in our hemorrhagic business. Neurocranial had U.S. organic sales growth of 14%, which included double-digit growth in the neurosurgical and ENT businesses, with strong growth in high-speed drill and balloon dilation products. Internationally, MedSurg and Neurotechnology had organic sales growth of 5.7%, reflecting double-digit growth in our instruments and neurocranial businesses. Geographically, this included strong performances in Australia, Canada and Japan. Orthopedics and Spine had constant currency and organic sales growth of 10.7%, which included organic growth of 10.9% in the U.S. and 10.1% internationally. Our U.S. Knee business grew 12.9% organically, which reflects our market-leading position in robotic-assisted knee procedures.

Our U.S. Hip business also grew 12.9% organically, reflecting solid primary hip growth fueled by our Insignia Hip Stem. Our U.S. Trauma and Extremities business grew 12.1% organically, with strong performances across all of its businesses, including Upper Extremities, Biologics, Core Trauma, and Foot and Ankle. Our U.S. Spine business grew 6%, led by the performance in our Enabling Technology and Interventional Spine businesses. Internationally, Orthopedics and Spine grew 10.1% organically, including strong performances in Canada and most emerging markets, particularly driven by Mako and strong Knee performance across most geographies. Now I will focus on operating highlights in the fourth quarter. Our adjusted gross margin of 63.9% was favorably – was favorable approximately 120 basis points from the fourth quarter of 2022.

This improvement was primarily driven by the continued easing of certain cost pressures, including the elimination of spot buy purchases that we experienced in 2022, and the continued benefit of pricing initiatives. Adjusted R&D spending was 5.6% of sales, which was 10 basis points higher than the fourth quarter of 2022. Our adjusted SG&A was 31% of sales, which was 40 basis points higher than the fourth quarter of 2022 due to continued investments, including sales growth incentives and a more normalized cadence of travel and meetings. In summary, for the fourth quarter, our adjusted operating margin was 27.2% of sales, which was approximately 60 basis points favorable to the fourth quarter of 2022. For the full year, our adjusted operating margin was 24.2% of sales, a 40 basis points increase over 2022.

This performance is mainly driven by the easing of certain gross margin cost pressures throughout the second half of the year as well as the positive impact of our pricing actions. Adjusted other income and expense of $31 million for the quarter was $23 million lower than 2022, mainly driven by higher interest income and other favorable discrete items. For 2024, we expect our full year other income and expense to be approximately $250 million. Our fourth quarter and full year had an adjusted effective tax rate of 14.6% and 14.1%, respectively, reflecting the impact of geographic mix and certain discrete tax items. For 2024, we expect our full year effective tax rate to be in the range of 14% to 15%. Focusing on the balance sheet, we ended the year with $3 billion of cash and marketable securities and total debt of $13 billion.

During the year, we paid down the remaining $850 million outstanding on the $1.5 billion term loan associated with the Vocera acquisition and achieved our deleveraging commitments. In Q4, we also refinanced certain debt maturities, including prefunding of $600 million that is due in May 2024. Turning to cash flow, our year-to-date cash from operations was $3.7 billion. This performance reflects the results of net earnings and higher accounts receivable collections. For 2024, we anticipate that capital spending will be $650 million to $700 million. We do not anticipate any share buybacks. And now I will provide 2024 full year sales and earnings guidance. Based on our momentum from 2023, strong procedural volumes, healthy demand for capital products and a stabilizing macroeconomic environment, we expect organic sales growth to be in the range of 7.5% to 9% for 2024.

There is one additional selling day in 2024 compared to 2023, with one less day in Q1 and one more day in both Q3 and Q4. Based on the steady progress of our pricing actions, we would expect the full year impact of price to be roughly flat. If foreign exchange rates hold near current levels, we anticipate sales will be modestly, unfavorably impacted for the full year, being more negative in the first half of the year. EPS will be negatively impacted $0.05 to $0.10. This is included in our guidance. Finally, for the full year 2024, we expect adjusted net earnings per diluted share to be in the range of $11.70 to $12, representing our commitment to accelerated operating margin expansion in 2024 as well as the stabilized – stabilizing operating environment.

While we do not provide quarterly guidance, we do expect seasonality for sales and related earnings to be similar to 2023, but adjusted for the quarterly differences in 2024 selling days. And now I will open up the call for Q&A.

See also 15 Countries that Produce the Best Software Engineers and 15 Highest Quality Bottled Water Brands in The US.

Q&A Session

Operator: At this time we will open the floor for questions. [Operator Instructions] Okay. Our first question comes from Robbie Marcus with JPMorgan. Your line is now open, please go ahead.

Robbie Marcus: Great. Thanks and congrats on another fantastic quarter. Kevin, maybe to start, I feel like it’s a bit of déjà vu, where we were sitting here at exactly this time last year and investors were starting to worry after a good year in 2022. And how good can 2023 be, and now people are wondering about 2024. So I was hoping you could give a little color behind the 7.5% to 9% organic sales growth. How much of that is transitory? How much of that is durable pricing? And any key drivers you could point us to? Thanks.

Kevin Lobo: Yes. Thanks, Robbie. It certainly was a terrific year in 2023. We had 9.7% organic the year before and over 11% organic in 2023. And frankly, we feel very good going into 2024. At some point, you think the comps will start to catch up a little bit. And so we think 7.5% to 9% is a strong guide. I can tell that coming off all of the domestic sales meetings, there is tremendous energy and excitement among our teams. The procedure volumes are strong. The capital markets are very strong. Hospitals are spending. We have we exited the year with more backlog than we began the year, which means, obviously, our orders are continuing to be strong for capital equipment. So we – and we have a number of new launches, again, planned in 2024.

Obviously, 2023 was a great year of capitalizing on product launches, whether it’s System 9, whether it was Neptune S, whether it was the 1788. We have other launches coming again. So our pipeline of innovation is very strong. And so I expect us to continue to grow at the high end of MedTech, in a MedTech market that is quite healthy.

Robbie Marcus: Great. Maybe, Glenn, a follow-up for you. And I appreciate you don’t guide quarterly, but there’s a lot you could do to help us get models in the right spot based on what you can say. And I guess, really the question is, my math is implying 50 to 100 basis points of operating margin expansion. You talked about the top line should look like 2023. And I imagine that looks like a normal comparable quarter and first quarter and maybe some sharper seasonality than historically down 3Q up 4Q. Also, anything down the P&L operating margin that we should be considering in that seasonality? Thanks.

Glenn Boehnlein: Yes. I think, Robbie – and I tried to sort of lay this out at the end of my guidance there, but I think a good place to start would be to look at sort of the cadence of sales and earnings in 2023. And really just adjust out for one selling day in Q1 and then adding two on the back end. And so as you look at pay Stryker, how are you going to deliver op margin expansion throughout the year, it’s probably a little more back half loaded just based on the cadence that we’ll see through the year for sales and related op income.

Operator: Our next question will come from Lawrence Biegelsen with Wells Fargo. Your line is now open. Please go ahead.

Lawrence Biegelsen: Thanks for taking the question. And I’ll echo Robbie’s congratulations on a really strong year and finish to the year. Kevin, I’d love to hear your updated thoughts on M&A headed into 2024. Your focus has been on paying down debt in 2023. Is your focus in 2024 on smaller deals? Are you open to considering something larger? And is the target area is the same as the ones you shared at the orthopedic meeting last year? And I had one follow-up.

Kevin Lobo: Yes. Thanks, Larry. I would say that we’re back on M&A offense now, what I’ll call our normal M&A offense. And as you’ve seen in the past with Stryker that would typically mean larger volume of tuck-in deals. And those can be large, and they can also be small. During the pause, while we paid down debt, all of our BD teams worked very actively. Believe me, they have a long list of targets, and we are going to be active now that we’ve gotten our leverage back to where we’d like to be. So let’s say we’re back to the normal Stryker offense. Expect us to be doing deals. We are open to larger deals. But our history would tell you that the vast majority of our deals are going to be smaller tuck-ins, but we can do many deals versus being very limited last year.

Lawrence Biegelsen: That’s helpful. And Glenn, to follow up on Robbie’s question on the margins. First, is it coming – the margin expansion coming – how much is coming from gross margin versus operating margin? And are you committed still to the 200 basis points getting back to the pre-COVID margin by 2025? I mean, it actually – I don’t know if the math – not to get too much into it, but it looks like – I thought it looks like over 100 basis points implied in the guidance this year. So I assume we can all figure that out off-line, but just any color on gross versus operating margin and the 200 basis points for the two-year, sprinting back to pre-COVID margins would be helpful. Thanks.