Stryker Earnings Call INSIGHTS: MedSurg Division, Fluctuating U.S. Recon Performance

On Wednesday, Stryker Corporation (NYSE:SYK) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

MedSurg Division

Richard Newitter – Leerink: I just wanted to maybe start off on the MedSurg division. I appreciate that you — it sounds like you have a number of growth acceleration drivers into the back half, particularly in instruments and endoscopy but can you just talk about the expectation that you are going to return to at least 5% growth? Can you talk about what the assumption is there for the medical division? Is that assuming a status quo or is there improvement embedded there as well?

A Closer Look: Stryker Earnings Cheat Sheet>>

Katherine A. Owen – VP, Strategy and IR: If you look back to what we talked about in the second quarter, we did see some reprioritization of hospital capital spending and a lot of that was around some of the requirements associated with the Affordable Care Act and I think we signaled that starting back in the May timeframe. That obviously doesn’t impact our capital purchases equally if you look at some of the trends that we are seeing certainly in instruments and based on some of the early read for endoscopy. Our full year assumptions right now do assume we get back to relatively flat maybe up slightly in medical growth on a global basis. That would imply that Q2 kind of bottoms and based on everything we are hearing from our customers that seems a reasonable assumption. If you combine that with the expected acceleration in endoscopy in the second half of the year as well as the continued momentum in instruments and obviously very strong growth from Stryker Sustainability Solutions, we’re comfortable with that 5% or greater underlying growth for MedSurg in total.

Richard Newitter – Leerink: And just maybe on your comments around Europe and Japan, I believe that was mostly on the Ortho Recon side, can you just talk about the non-macro related issues that you referenced? You said execution maybe have driven the weakness there. What are you doing internally? What initiatives are in place to improve execution there?

Curt R. Hartman – Interim CEO, VP and CFO: Relative to Europe, we’ve had a number of ongoing organizational changes that we are working our way through, the right changes and the right structure moves to address where we see the European market moving to, and it’s been a bit of a moving target over the last couple of years for us, and part of that is external environment focus, but we have to be intellectually honest. Part of that is our failure to execute and we’re still a little bit playing catch-up to where the market is going and where we think we need to be and that was my reference to be in better at executing. So, we have a number of things that we’re looking at relative to distribution channels relative to the way we’re organized, relative to the way we get new products through the regulatory process in a faster fashion. And no single one of those is going to change our outlook, but it’s a combination of all of those that we have to stay on top off and execute. And I feel that we have the right things in place and we’re moving quickly to do that. There is no quick solution here. We’ve been working on this for far too long, frankly, and we just got to pay more attention to it.

Fluctuating U.S. Recon Performance

Michael Weinstein – J.P. Morgan Securities Inc.: Curt, maybe let’s just spend a minute on U.S. Recon because the performance really changed from the first quarter to second quarter, that probably better than the beds business, which you had already highlighted is what stands out here. So, can we spend a minute on what you think changed from first quarter to second quarter, where I think first quarter you are up 2.5% in constant currency, and this quarter you were down 3.5%?

Curt R. Hartman – Interim CEO, VP and CFO: Pointing to the earlier comments, southern Europe specifically was very, very slow for us in the Reconstructive segment, hips and knees specifically. And I don’t think that’s unique to us. I think perhaps the way we were approaching the market and what we were doing with that organization as we were fairly inward focused, we probably took our eye off the ball. And I think for us in the quarter one of the surprises was Japan, we had a very tough year-over-year comparable, but I never want to use that as an excuse. We saw some pricing pressure hit in the second quarter in Japan, but we also saw some slowing in that market for us. That was probably the one that we didn’t quite have our eye on, was Japan slowing. So Europe again, it would be more southern Europe, we saw good performance out of places like the U.K., but southern Europe we really had a shortcoming and it gets back to my commentary about executing a lot better because I think certainly we lost market share in southern Europe.

Michael Weinstein – J.P. Morgan Securities Inc.: And if we characterize the tone maybe over the course of the quarter, do you feel like it got worse, do you have that insight into either Europe or Japan, whether the business was healthy in the first half, weaker in the second half or is that being too granular?

Curt R. Hartman – Interim CEO, VP and CFO: That’d be a pretty granular comment, but I would go back to our — some conferences early in the quarter where both Katherine and I talked about seeing softness in Europe, and I think that initially was driven more from a macro perspective and things we are hearing from people on the ground. And then I think you coupled that up with some of our own internal short comings, we probably felt little further than we had originally anticipated.

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