Stryker Corporation (SYK) Earnings Call Transcript & Summary

Good day and welcome to the Stryker Annual Meeting of Shareholders. Stryker's 41st Annual Meeting of Shareholders is being recorded for replay purposes. Before we begin, I would like to remind you that the discussions during the meeting 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 the slides for the meeting posted on stryker.com. I will now turn the conference over to Kevin Lobo, Chairman and Chief Executive Officer.

Good afternoon. On behalf of the Board of Directors of Stryker, I would like to welcome you to the 41st Annual Meeting of Shareholders. I have the honor to serve as the Chairman and CEO of Stryker. Also participating in this meeting is Dean Bergy, Vice President, Corporate Secretary; and assisting us with Q&A will be Sean Etheridge, Assistant Secretary. During today's meeting, I will address what is likely being the most unprecedented start to any year in Stryker's history. As the COVID-19 pandemic progresses, I want you to know that we've responded swiftly and continue to take action to provide much-needed support to the health care professionals on the frontlines, so they can keep helping patients who are in most need. From the beginning, our first priority has been to keep our employees, their families and our communities safe; our second is to continue to serve our customers; and third, to maintain strong financial discipline. I am proud to say we have continued to rally around these 3 areas, and we'll discuss how Stryker has risen to this challenge during my business update. So that I can officially call the meeting to order, I'll ask Dean to establish that this meeting has been duly called and that a quorum is present.

Thank you, Kevin, and good afternoon. With me, I have an affidavit related to the mailing of the notice of the meeting and proxy materials on March 24, 2020, to all shareholders of record as of March 6, 2020, the record date fixed by the Board of Directors. A certified list of the shareholders of record of the company as of March 6, 2020, and the minutes of the 2019 Annual Meeting of Shareholders are available for inspection by any shareholder. Irene Corbe, Vice President, Internal Audit; and Sean Etheridge, Assistant Secretary, have been appointed to serve as inspectors of election. Based on the proxies received, the inspectors have reported to me that a majority of the 374,828,201 shares of common stock entitled to vote are represented at the meeting either in person or by proxy. A quorum of common stock is, therefore, present, and the meeting may proceed.

Thank you, Dean. On the basis of the Secretary's report, this meeting is duly constituted. The meeting is now open and ready for business. I would like to start by acknowledging Louise Francesconi who is retiring from our Board after 14 years of exemplary service. Louise made significant contributions to our strategy and growth during that time and was also a catalyst in the successful recruitment of many new Board members as she chaired our Governance and Nominating Committee for many, many years. Thank you, Louise. We are deeply appreciative of your contributions. Next, I will introduce the individuals who serve as directors of the corporation and are standing for reelection this year. They are in attendance online today. In the photo from left to right: Ronda Stryker serves on the Boards of Greenleaf Trust and Spelman College. She is the granddaughter of Dr. Homer Stryker, the founder of our company; the daughter of Lee Stryker, a former president of the company. Mary Brainerd is former President and CEO of HealthPartners, the largest consumer-governed U.S. health care organization. Andy Silvernail is Chairman and CEO of IDEX Corporation. Andy chairs our Audit Committee. Allan Golston is President, U.S. Program for the Bill & Melinda Gates Foundation. He is our Lead Independent Director. Rajeev Suri is President and CEO of Nokia Corporation. Srikant Datar is the Arthur Lowes Dickinson Professor of Accounting at the Graduate School of Business Administration at Harvard University. Roch Doliveux is President of Pierre Fabre SA, Chairman of the GLG Institute and a Director and former CEO of UCB, a global biopharmaceutical company. He chairs our Compensation Committee. Sherry McCoy is former CEO of Avon Products and also former Vice Chair of Johnson & Johnson. She chairs our Governance and Nominating Committee. We are also pleased to have identified an extremely well-qualified director candidate, who is nominated for election at this meeting. Lisa Skeete Tatum is Founder and CEO of Landit, a technology platform created to increase the success and engagement of women and diverse groups in the workplace. Among her many other talents, she brings experience in health care technology investing to our Board. I would also like to recognize 2 individuals who embody and helped shape Stryker's rich culture and history of performance. John Brown, our Chairman Emeritus, led the company for over 3 decades, and his imprint is still very visible in our company today. Director Emeritus Howard Cox devoted over 44 years of service as a director and made innumerable contributions to the company's growth and success during his tenure. They both continue to be great ambassadors of Stryker. I am also proud to introduce the Stryker leadership team. In the photo from left to right, Glenn Boehnlein is our CFO and responsible for the company's financial operations. Rob Fletcher is our Chief Legal Officer. Viju Menon is Group President, Global Quality and Operations. He oversees quality, manufacturing, procurement and logistics. Yin Becker is responsible for public affairs, communications and corporate marketing. Tim Scannell is President and Chief Operating Officer. Andy Pierce is Group President of our MedSurg and Neurotechnology businesses. Spencer Stiles is Group President of our Orthopedics and Spine businesses. Katy Fink is our Chief Human Resource Officer. Katherine Owen is responsible for strategy, Investor Relations and business development. We recently announced that after 13 very successful years, Katherine plans to retire to spend more time with her family. She has made many significant contributions to the company's success and has been a strong collaborator with her teammates on the leadership team. We wish her the very best in her retirement. Effective June 1, Preston Wells will lead our Investor Relations function. Preston has a strong background in finance with over 20 years of relevant experience at both Stryker and in other industries. We are fortunate to have a talented and experienced leadership team, which lives our mission and values each and every day. In addition, I want to recognize our other corporate officers who are pictured on this slide. In the first quarter, Jody Powell, who's pictured as second from the right, was appointed Vice President, Global Regulatory Affairs and Quality Assurance. She replaced Bill Cymbaluk who retired after 35 years at Stryker. We also recently announced that Dean Bergy will retire after 26 years at Stryker. Dean has provided terrific service to Stryker in his many finance roles, including CFO of the company for 7 years and has been our Corporate Secretary since 2011. We thank Dean and wish him a happy retirement. Effective July 1, Sean Etheridge will assume the Corporate Secretary's role. Sean joined Stryker in 2014 and has been serving as Assistant Secretary since 2017, in addition to other duties related to mergers and acquisitions. Noted on this slide is our corporate counsel. Rich Witzel, Partner of Skadden, Arps, Slate, Meagher & Flom; and Chris Larson, Partner of Ernst & Young, our independent accounting firm. Dean will now introduce the proposal included in the proxy statement.

Thank you, Kevin. There are 4 proposals included in the proxy statement. Any shareholder of record who is logged in as such on the meeting website may vote online. If you have previously granted a proxy, your vote today will automatically revoke your proxy. Voting will be tabulated after the proposals have been presented. If anyone during this period would like to ask a question related to a specific proposal, please type your question in the Q&A box on the meeting website. Questions submitted in advance of the meeting regarding a specific proposal will also be addressed. General questions will be addressed later in the meeting. The first proposal is the election of 10 directors. The nominees for election as directors are: Mary Brainerd, Srikant Datar, Roch Doliveux, Allan Golston, Kevin Lobo, Sherry McCoy, Andy Silvernail, Lisa Skeete Tatum, Ronda Stryker and Rajeev Suri. As there have been no other nominations during the designated nominating period and in accordance with our bylaws, the nominations are now closed. The second proposal to come before the meeting is ratification of the appointment of Ernst & Young LLP as the company's independent registered public accounting firm for 2020. Under SEC rules, the responsibility for the appointment and oversight of the company's auditors resides with the Audit Committee. However, today, we continue our practice of asking shareholders to ratify this appointment The third proposal to come before the meeting is say on pay, an advisory vote to approve the compensation of the company's named executive officers as disclosed in detail in the proxy statement under compensation discussion and analysis and executive compensation. The fourth proposal to come before the meeting is a shareholder proposal related to nonmanagement employee representation on the company's Board of Directors. Mari Schwartzer of NorthStar Asset Management, Inc. will present this proposal to the meeting.

My name is Mari Schwartzer of NorthStar Asset Management, a socially responsible investment firm based in Boston and the beneficial owner of 54,227 shares of Stryker common stock. Today, I am presenting proposal #4 regarding employee representation on the Board of Directors. Never before in our lifetime have our company or our employees face such uncertainties or such a grim prospect for the future as posed by the current global pandemic. As our company works to navigate these unpredictable times, employees and their relationship to our company can be the guiding force that allows us not only to emerge safely but also stronger and more competitive. This shareholder proposal encourages the company to explore ways in which nonmanagement employees could obtain membership on the Board of Directors because we believe that all employees are critical to our company's continued success and deserve a voice. We also believe that employees with a seat at the table are more likely to remain engaged and committed to the company. This time of crisis does not diminish the potential value of adding employees to the Board. In fact, crises and transformative eras emphasize the potential value of fresh voices on the Board of Directors. Direct employee communication with the Board could offer significant efficiencies as our company and the economy seek innovative solutions to these unprecedented challenges. The existence of employees on U.S. corporate boards is not unheard of. Several other publicly traded U.S. companies have had or currently have workers on the Board of Directors. We believe that employees in the Board of Directors could help our company continue to thrive in several ways such as more efficient communication of problems faced by employees and the creative solutions those workers come up with; faster alerts to potential pending crises that could diminish our brand name; increased employee engagement and better retention; expression of employee assessments of managers, executives and workforce morale directly to the Board; and much more. Our employees are the driving force of our company. But if their trust in management falters due to disenfranchisement or missteps, our company may suffer. To prevent this, we suggest allowing and encouraging representation on the Board by nonmanagement, nonexecutive employees. We believe that employee representation on the Board is a key way to ensure that employees, our most crucial resource, remain fully engaged in the long-term growth of our company and help to ensure operational excellence. We urge shareholders to vote for proposal #4. Thank you.

Thank you, Mari. Our corporate bylaws do not require motions and seconds. All of the proposals on the agenda are now before the meeting. As previously mentioned, any shareholder of record who is logged in as such on the meeting website may vote online. If you have previously granted a proxy, your vote today will automatically revoke your proxy. Sean, do we have any questions on the proposals?

We have no questions on the voting items, Dean.

Thank you, Sean. The voting is now ended, and we will close the polls. The inspectors will complete the vote count, and we will announce the preliminary results later in the meeting. While that is taking place, Kevin will share a view of Stryker's performance and future outlook.

Thank you, Dean. I'd always like to start every one of my presentations with our mission and values, which you see on this slide. I have been absolutely inspired by the way our employees have partnered with our customers on the frontlines during this pandemic, and they have displayed the values of our company that are listed on the slide. I will outline some of these activities later on in my presentation. Turning to our company strategy. You'll see that this slide has not changed at all in the past year as we continue to believe that it provides the right approach to driving value over time for all of our stakeholders. The next few slides will sum up 2019. Even though it seems like the year ended a long, long time ago, given the pandemic, it is worth some reflection. Starting with the pie chart. You can see here, we have market-leading positions in many parts of medtech with a strong set of businesses in the 3 segments of MedSurg, Orthopedics and Neurotech and Spine. And in fact, we have fortified our position in these segments, both through acquisitions and internal innovations over the past 7 or 8 years. The next slide shows a truly landmark achievement. Since we became a public company in 1979, we've had 40 straight years of sales growth, a record that's really unsurpassed and a remarkable example of performance over time. Turning to the next slide, you can see our growth versus the market. And depicted here in the blue bars, you see our growth outperforming the market every single year. In fact, if you went back all the way 2013, we've accelerated our own organic sales growth for 7 consecutive years, culminating in a very strong 8.1% sales growth in 2019. So clearly, we had an excellent year in 2019. So now we'll shift gears and talk about 2020 and starting off with how we are dealing with the pandemic. Our 3 priorities are listed here, as you can see in the 3 pillars: firstly, to protect our employees; secondly, to serve our customers and communities; and third, to display financial discipline. I'm really proud with how our team has responded as we have ramped up production in some very needed items, as you can see in the middle, whether it's our beds and stretchers or our emergency care products as well as a very innovative emergency relief bed, which was from design to launch was under 2 weeks, an amazing achievement by our medical division to bring that to the frontlines. We've also taken very decisive actions to help reduce costs to mitigate some of the impacts we're having from the sales slowdown given the pause in elective surgeries in many parts of the world. And as it relates to protecting our employees, you can see there many, many examples of how we are protecting our employees through temperature checks and making sure we have PPE policies. It's been really an unprecedented environment, but I'm really, really proud with how our team has performed through all of these 3 pillars. So now I'll turn to our Q1 results, which we reported last week. As you may have heard, if you saw our earnings release, we had a very strong start to the year, up and through the middle of March until the coronavirus hit. And then, obviously, we had a steep falloff in the second half of March. The elective surgery impact of these delays around the world and postponements of surgery mostly impacted our Orthopedics, Spine and Endoscopy business and also had other impacts to some of our other capital businesses. However, in spite of this impact, we still managed to have positive organic sales growth of 2.4% in spite of that. So it's a really strong performance in spite of the slowdown. And our adjusted earnings per share was minus 2%, so we were able to really mitigate the decline in sales by strong cost-control measures. And as you also heard last week, we decided to withdraw our guidance for both the second quarter and for the full year, given that the timing of resumption of surgery is really impossible to predict and the duration of the pandemic is impossible to predict at this time. However, I would like to give some context to how we're looking at the rest of 2020. Right now, it's quite an exciting time as we're hearing many states and geographies around the world starting to return back to work. And so we're prioritizing, again, safety of our employees as they come back to work, but we're starting to prepare for commercial recovery, which is really a healthy dynamic. We're going to do it in a very careful and a very cautious way. The strategy that I mentioned before, those strategic pillars are still very much in play. Globalization, which has been an engine of growth for Stryker, continues to be a very important focus for us as we still have significant opportunities to grow our business around the world. And we remain very committed to internal innovation through R&D. If you saw our first quarter results, our R&D spend continues to be north of 6% of sales, and we have not canceled any of our R&D projects. We're moving full speed ahead with all of our major programs and continue to invest at a very high rate in research and development. And lastly, we are proceeding with the Wright Medical integration, which we continue to expect will close at the end of the third quarter and which will be our largest acquisition in the history of the company. Moving ahead to the next slide to talk a little bit about corporate responsibility. On this slide, you can just see a snapshot of some of the many different ways that we are helping with the pandemic. You see the emergency relief bed as well as the protective equipment that Stryker makes, both for the sterile and nonsterile environments. You can see other pictures showing how we invest in people, in terms of our environmental responsibilities as well as social responsibilities. So these are just some examples of the progress that we've made over the years and our commitment to really making sure that we provide value to all of our employees, the society and even the planet and that we take these responsibilities very seriously. We have a full corporate responsibility review for 2019. That's available on our website, stryker.com, if you'd like to see more details of our commitment through our mission and values. The next slide shows some of our global recognitions. As many of you know, we have been winning many, many awards as a Great Place to Work, and here are some pictures that you see. Very pleased to see in the Fortune 100 Best. We've been on that list for a decade and had our highest ranking ever as #8 on that list in 2020 just recently this year. I'm also very pleased to see many awards as a Great Place to Work for diversity as well as a Great Place to Work in geographies around the world. And that's something that's been gaining steam over the past 4 or 5 years as we increase our globalization. So in summary, 2019 was another very strong year of organic sales growth and earnings growth, which was even faster than our sales growth. In 2020, the focus is on safely ramping back up and recovering as more elective surgery is resumed. As you saw from the first quarter impact, we are not immune from COVID-19, especially since roughly half of our business is exposed to elective surgery. However, we have very strong financial liquidity, a very strong balance sheet that it will make sure that we can weather the storm. And lastly, we are absolutely committed to living our mission and values. So with that, I would like to turn the microphone back to Dean who will report our preliminary voting results.

Thank you, Kevin. I'm advised by the inspectors of election that each of the persons nominated for director in proposal 1 received at least 292,372,326 votes in favor of his or her election, and therefore, each has been duly elected a director of the company. I'm also advised by the inspectors of election that shares representing a majority of the total votes cast on proposal 2 were voted for ratification of the appointment of Ernst & Young LLP as independent registered public accounting firm for 2020. I'm also advised by the inspectors of election that shares representing 94% of the total votes cast on proposal 3 were voted in favor of the advisory vote on the resolution relating to the company's named executive officer compensation. And lastly, I'm also advised by the inspectors of election that shares representing 94% of the total votes cast on proposal 4 were voted against the shareholder proposal related to nonmanagement employee representation on the company's Board of Directors. The final results of the meeting will be filed on Form 8-K with the SEC shortly, and the meeting is now adjourned. General questions will now be addressed. They will be grouped by topic and answered as time permits. Answers to any questions that are not addressed will be published following the meeting on our website.

Great. Thank you, Dean. So Sean, can you please read the first question?

Thank you, Kevin. The first question reads, why are Board members compensated so highly?

Yes. Thank you, Sean. So we strive to pay our independent directors around the median of our peer group, which is listed in our proxy. Our Compensation Committee regularly engages an independent consultant who reviews our director pay versus our peers. And in their most recent survey, our director pay was slightly below the median of our peers, so very much in line with our overall objectives related to director pay.

Our second question comes from one of our shareholders who was personally advised by their health care professional against considering a Stryker implant for their total knee replacement surgery due to a nickel allergy. This shareholder asked if we would consider developing nickel-free implants.

Yes. Thank you, Sean. Most of the major orthopedic players do not have a nickel-free offering. The reason for this is that it's actually a very, very small percentage of people that have nickel allergies. And we have focused our offering to serve sort of the broader population. However, it is something that we continue to evaluate and something that we may launch in the future.

Our third question reads, the carpenter union's pension funds with combined assets of $70 billion have a collective ownership position of 116,950 shares of Stryker common stock. As long-term shareholders, we appreciate the efforts of the company to address the difficulties faced by employees, customers and other important stakeholders during the COVID-19 pandemic. Do you expect to see a decrease in the company's capital expenditure budget off the level of recent years due to the pandemic?

Yes. As you saw on the slide that I showed with the 3 pillars and financial discipline was the third pillar, we have taken action around reduction of cost as well as conserving cash and have slowed some of our capital spending. At this point, we estimate that we'll spend -- we'll have about a 30% reduction in our capital spend in 2019. However, we continue to monitor the environment. And based on the pace of recovery, that may change. But yes, it's safe to say that we will spend less than we had planned at the beginning of the year in light of the pandemic.

Our fourth question reads, the recent growth in the size of passive mutual funds corporate ownership interest in U.S. corporations has been dramatic, raising important public policy and corporate governance issues. Currently, BlackRock owns 7% and Vanguard owns 7.6% of the company's outstanding shares. Does the Board see this growing ownership concentration of passive index fundholders as a positive or negative development as regards long-term corporate planning and performance?

Yes. So the trend towards passive investing is not a new dynamic. It's been going on for a number of years. Passive investors tend to invest for the long term, which, in some ways, is a benefit to our company as we make long-term strategic decisions and that are focused on multiple stakeholders of our company. Of a company of our size with a market capital of over $65 billion, we have all types of investors, as you can imagine, whether it's active or passive. We can't really influence or determine the types of investors that choose to own the Stryker stock. What we tend to focus on is really delivering value for our company, making good capital allocation decisions, driving growth and performance at the high end of medtech. And if we do that, over time, we know that our shareholders will be rewarded, whether they're passive investors or active investors.

Our fifth question comes from a shareholder that is having shoulder surgery in the next few months and would like to ask our doctor for Stryker products. This shareholder asks if we have recently introduced or plan to produce any significant changes, improvements or new products used for shoulder replacement.

Well, thank you for the question. We do have a very good shoulder portfolio, and you can ask for that implant. I would say with the Wright Medical acquisition that will be closed later this year, we will also be acquiring their shoulder implants, which will add to the existing portfolio that we have today.

Our next question is, will Stryker be cutting the dividend in 2020?

At this point, we have no plans to cut our dividend. As I mentioned before, we have a very strong financial liquidity position. And I already announced that we have the next dividend scheduled and planned and approved by our directors and no plans to cut the dividend in the near future.

Our next question, how has COVID-19 affected Stryker's talent pipeline? And what is Stryker's plan moving forward for hiring new talent?

As part of the financial measures that we've taken, we have had a pause on hiring. There are certain exceptions if we have critical positions that we need to hire. As an example, software engineers, which are critically important for our research projects, we'll make certain exceptions. But by and large, given the slowdown in sales, we have put a pause on hiring. And as the market resumes and procedures resume, we will then start to resume our hiring. But for the near term, we are taking a pause on hiring, and we will gear up again as the business recovers.

Our next question is, once we hit the new normal, will Stryker continue to acquire medical companies in order to grow our product portfolio? Also, do you see a future in fully integrating acquired companies such as Mako?

I'm not sure what the fully integrating means. Every company that we acquire does get integrated within our Stryker divisions. Mako was fully integrated into the joint replacement division. We do operate as a decentralized company. So when we acquire a company, it does get integrated into one of our divisions, but we do plan to maintain that decentralized approach. It has been very successful for Stryker over our entire career history of Stryker, and we plan to continue that. Acquisitions is a very important part of our offense. We've taken maybe a little bit of a pause, although we have our pending acquisition, the largest in our history. That will be happening in the second half of this year. And our business development team are continuing to scour the market to look for new acquisitions. And so you should expect as early as 2021 that we will be continuing to do smaller tuck-in acquisitions, which are the bread and butter of Stryker. So acquisitions will continue to be part -- a very important part of our ongoing offerings.

Our next question, has the emergency relief bed been introduced worldwide? If not, will it be?

Yes. We have already started to launch the bed outside the United States in both Latin America and Europe. And we believe that it's going to have very, very high demand, both through this pandemic and even potentially after the pandemic.

And for our last question, Kevin, we have a shareholder that notes that Stryker is still using Adobe Flash to push the proxy statements out to shareholders, and they would encourage us to consider moving to the new HTML5 platform in the future.

Sure. We will definitely take that under advisement. Thank you.

We have no further questions, Kevin.

Great. Well, thank you, all of you, for joining us today. 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, working hand in hand with the frontline health care professionals and emergency medical technicians. Our manufacturing teams have worked tirelessly to optimize the plant network and 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 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 ramp as the situation improves. Thank you all for your continued support of Stryker.

The conference has now concluded. We thank you for attending. You may now disconnect.