Kevin Lobo - President and Chief Executive Officer
David Floyd - Group President - Orthopaedics
Tim Scannell - Group President - MedSurg & Neurotechnology
Ramesh Subrahmanian - Group President - International
Lonny Carpenter - Group President - Global Quality and Operations
Bill Jellison - CFO and VP
Scott Bruder - CSMO
Chris Hammond - Goldman Sachs
Bob Hopkins - Bank of America Merrill Lynch
Rick Wise - Stifel Nicolaus & Company
Derrick Sung - Sanford C. Bernstein & Co.
Joanne Wuensch - BMO Capital Markets
Richard Newitter - Leerink Swann
Matt Dodds - Citi Investment Research
Kristen Stewart - Deutsche Bank
Glenn Novarro - RBC
Bruce Nudell - Credit Suisse
Mike Matson - Needham & Company, LLC
Rajbir Denhoy - Jefferies & Company, Inc.
Stryker Corporation (SYK) Analyst Meeting September 5, 2013 9:00 AM ET
Good morning and welcome to Stryker's 2013 Analyst Day Presentation. I trust that all of you who attended the Neuro Products Fair last night really enjoyed that and got a chance to have a full appreciation for the breadth of our neuro technology offering. The materials from the neuro fair are actually in your binder and have been posted online. Also included in your binder is a business overview which gives in information about our new products as well as standard financial information.
The presentation that you are going to see today is going to be projected on the screen behind me as well as on the webcast slide by slide. Those presentation materials are not included in your binder. Before I begin I would like to make a few comments as I approach the one year mark as the CEO of Stryker.
First we have been continuing to deliver quarter-after-quarter strong operational results.
Second we have a strong and talented executive leadership team with a nice mix of tenure at Stryker.
And third we have a clear road map for success both in driving growth and delivering leverage. And you are going to be hearing all about that later today.
Starting with the executive leadership team, if you look at the top row all of these members were members of Stryker's executive leadership team one year ago. If you look at the first three Curtis, Lonny and Tim they are all Stryker veterans, each of which have over 20 years of experience at Stryker. Tim Scannell's job changed at the beginning of this year where we added the Neuro Technology portfolio to his responsibilities and we shifted spine out of his responsibility to orthopedics.
At the top there you can see Katherine Owen who you all know very well; Katherine is going on seven years at Stryker. And Ramesh is approaching the two year mark at Stryker. Moving to the bottom row the first two members are Stryker veterans Yin and Steve, they both joined the executive leadership teams through promotions. The last three members are all new to Stryker. David Floyd Group President of Orthopedics joined Stryker last November; Scott Bruder our VP Chief Medical and Scientific Officer joined Stryker in January; and Bill Jellison our CFO joined Stryker in April. While all these three are new to Stryker they all have deep healthcare experience and are providing fresh perspectives to our management team.
So this the slide that you have all seen through the course of the year, but it's very useful as a reminder of the breadth of Stryker, where no one single business represents more than 16% of total company sales. And this broad diversification is really helpful to deliver consistent performance and also positions us very well in very attractive segments of Medtech as you saw last night at the Neuro Technology Products Fair.
There are four key themes that we have been driving and placing emphasis on since the beginning of the year, starting with globalization we have a significant opportunity to grow in the premium segment of markets outside the United States as well as in the lower price segment which you see illustrated with our Trauson acquisition.
Next is innovation; innovation has long been a market success at Stryker, but it's been primarily focused on product innovation, our traditional strength. We're not looking to broaden our lens on innovation, to look at the entire procedure beyond the product and also expanding out into other areas, like customer education which you see illustrated with our get around knee campaign. On the bottom you see collaboration, Stryker's history was fiercely centralization and over the past few years we have been changing our internal structures and motivations to encourage our divisions to work together and leverage the breadth of our offering with our customers, we had some very nice early success primarily in the neuro space as you saw that last night with the way the neuro technology business has actually worked together and you will be hearing more about that from Tim and we're encouraging that across all of Stryker. It takes time, we’re still in the early days but it's a significant opportunity that we see in front of us.
And lastly cost optimization, so you are going to hear from Lonny his progress with the global quality and operations organization and you see the 3% to 5% reduction in annual cost of goods as one metric that we have already shared with you. But you are also going to hear today about cost reductions across balance of the organization with many, many initiatives beyond Lonny's initiatives.
So here was our agenda for today, you see the line up here of all of our speakers. Today’s presentation is going to be different. We’re trying to enhance the value and so we’re not going to show you just standard financial information which you can read a reminder we’re really going to be focused on two things: driving growth and delivering leverage, that’s the main focus of our presentation each presenters going to come up and talk about their plans to drive growth and deliver leverage. And then we’re going to have significant time for question and answer and then we have shores of our manufacturing facility for those of you who are interested two of our sites.
I would like to emphasize although you’re going to see a number of initiatives from each presenter, we’re not going assign numbers to each initiative. And what you can expect in each January when we set our financial guidance what you should see is a growth number, organic growth at the high end of Medtech and meaningful operational leverage. So the accumulation of all of these initiatives will help drive that growth at the high end and significant operational leverage.
So with that I’ll turn it over to David Floyd, Group President of Orthopedic.
Thank you, Kevin. Good morning, everyone. I have had an opportunity to meet many and perhaps most of you over my 26 years in the orthopedic industry and I am absolutely thrilled to be here today as a part of Stryker’s management teams approaching my one year anniversary with Stryker where I lead orthopedics group. It was consist of a reconstructive, our trauma and extremities, our foot and ankle, our spine and joint preservation, our orthobiologics and our performance solutions businesses. I want to talk about driving growth and delivering leverage across these businesses as we move into the future.
Driving strong top line growth has been a hallmark of Stryker, it’s what you come to expect from us year-after-year is absolutely what we expect of ourselves. I want to talk about some reasons why we’re confident that in the environment on a go forward basis we’ll be able to continue deliver strong top line growth. I want to start with our selling organizations, always been one of the great things about Stryker’s performance. Our sales models are designed to meet the increasingly complex needs of the surgeries and the surgeons we serve across the segments that we’re in to meet the clinical needs of patients and the clinicians that treat them.
We believe that increasing technical sophistication and technical expertise on the part of selling [indiscernible] is required as our portfolios become larger, become more broad and they become more sophisticated and as the surgeons we serve become more sub-specialized. The sub-specialized surgeon in shoulder surgery expects someone calling on them who know shoulder surgeries, who can really do it, a foot and ankle surgeon wants a foot and ankle expert working with them. So we’ve been driving increasing sales specialization throughout the U.S.
If you look at our field sales force and the orthopedics group in the U.S., we’re about 2,500 strong, only 75% of those people are specialized either in recon or in trauma or in foot and ankle or in joint preservation or in spine and are dedicated to understanding those product portfolios and driving superior growth, the strong technical expertise in the operating room with clinicians. We still have some full line reps, we’re going to increase specialization even more, we will always have full line reps in some geographies where it makes sense, we’re absolutely committed specialization.
At the same time what we don’t want to do is create a lot of redundant infrastructure out there behind each and every one of the selling channels. So we have been and planning to continue to leverage our strong primarily direct branches, branch management and sales and logistic infrastructure around the country consolidated behind these diversified sales people. And what the customer sees is the highly specialized sales rep who can meet the customer’s needs at the point of surgery but behind that we have a consolidated operation now consolidated across our trauma and our reconstructive branches under a single branch general manager for the region and a single sales support network, so we think that drives both growth and leverage.
Second of all our product portfolio, as this really continues to be about products and we continue to expand and diversify our product portfolio, some of the ways we’re doing that if you look across all of our product portfolios, all across our divisions, two things we’re focusing in on and first of all simplification, second of all differentiation. When I talk about simplification, I’m talking about simplification as seen by the customer and in particular seen by the hospital and by the surgeon. How do we make the procedures easier to do, how do we make the procedures more efficient, how do we make them less costly for the customer delivery. Can we do fewer instruments, can we eliminate procedural steps, can we make the surgery easier, can we make it less invasive, can we reduce sterilization cost. So those are areas that really focused in on in terms of simplification.
In addition is diversification -- differentiation across our product portfolio, always looking for new segments that we can develop or are developing where we can bring new products to the markets that are substantially differentiated from competitors’ products so that we can drive meaningful growth? In addition to this across all of these portfolios, some of our segments are not very price sensitive and also in segments where a product lifecycle turnover is shorter and where meaningful innovation is rewarded earlier and faster. So we look at trauma, if we look at extremities, particularly in foot and ankle, if we look at the minimal invasive sub segment of spine and we look at joint preservation, we see opportunities to really expand our portfolio substantially there and drive growth.
And turning now to biologics, broadening our biologics’ capabilities we think is a key growth driver for us in the future. We acquired Orthovita, which gave us a substantial amount of expertise, research and development, clinical and regulatory, manufacturing and marketing expertise and proprietary collagen processing technology along with substantial products in Vitagel and Vita. We are and we will continue to build on those. We have a good pipeline of products and development as well as targets we have out in the market that we acquire. We can take advantage of this expertise sometime this clinical regulatory expertise that needs to be taken advantage of, sometime it's R&D expertise, sometimes its product we think is ready for market; we need to be able to manufacture it. In addition, we have opportunities to use our manufacturing capabilities to bring things in-house.
And finally cross divisional product portfolio collaboration, we think there is great power in the breadth and depth of our portfolio across all of our divisions, and we’re beginning to see some meaningful results whereat the customer level we can bring that breadth to portfolio and win. Couple of examples of what we’re focusing in on that now first of all in Joint Preservation, we have a small but very rapidly growing Joint Preservation business, which sells implants and related instruments in the space for sports medicine procedures in the knee and the shoulder.
We have a great position through Stryker endoscopy in the arthroscopy market with visualization and cameras and shavers, finding ways to bring those together at the account level particularly in the Ambulatory Surgery Center where the clinician also tends to be an owner in ways that are meaningful on a platform allowing us to drive share in ways that we otherwise wouldn’t.
We are also having some interesting experiences in Spine. We can come together at the hospital with surgeons to offer combinations not only for our spinal implants with navigation from a navigation business unit powered surgical instruments and Stryker instruments, surgical suite technologies and Stryker communications come and put together an overall package that hospitals and surgeons are finding compelling, allowing us to win in accounts that we might otherwise not be able to win in. So those are some examples of how we intend to drive growth and reasons why we’re confident we’ll continue to drive superior growth on into future.
We will turn now to delivering leverage, why are we confident that we’ll be able to in an environment that we face drive our operating income growth faster than the rate that we drive sales growth, particularly as we drive sales growth rapidly. First of all as a focus on key power brands, I will specifically talk now about our recon division, our hip and knee business; we really are focused on driving key power brands. Last year, we launched the Accolade 2 building on the decade-plus heritage of the original Accolade hip.
A well accepted hip, excellent clinical track record but we had opportunities we believe with our SOMA database to make some changes to the dimensions of the hip, improve some sizing for all call better fit and feel, and modernize it based on that heritage. We launched that hip and you’ve seen the results in our hip sales over the past few quarters, it has been hugely successfully for us. We are following that on this year with a launch of Secur-Fit Advanced. Secur-Fit Advanced like Accolade, there is a femoral hip stem, it actually has two decades of clinical heritage over 20 years ago we launched the Secur-Fit platform, it is a smaller segment but a meaningful segment of the Hip Market that proximal fit and feel segment.
We are launching Secur-Fit Advanced, and there's a tag line that we have used with that Proven Designs Refined and quite frankly can apply broadly across our portfolio including our Triathlon platform, so we have singular knee platform virtually everything that we sell in the United States is Triathlon increasingly what we sell outside the United States is Triathlon which we built a strong consumer brand around Triathlon that get around knee.
So Triathlon is coming up on its 10-year anniversary, it is performed very well in the marketplace, you’ve seen the way we have been able to drive growth and capture share with Triathlon. The clinical results have been outstanding. Surgeons are very happy with it. Quite frankly, we do not think investing in a brand new product platform introducing an expensive new unproven knee in the marketplace today makes a lot of sense. We like Triathlon, we think Triathlon is very competitive but there are ways to expand on Triathlon, so this year we’ve launched a new all-polyethylene tibial components for Triathlon. We have launched a new of course the titanium base plate. We will continue to expand on the Triathlon platform and leverage it. One of the most interesting opportunities we think with Triathlon is instrumentation. When we ask surgeons what do you want that you don’t have, none of them were telling us we need different implants, they’re telling us better instruments, we need better procedure floor, more efficiency in the operating room.
The second thing in terms of driving leverage is increasing the amount that we get out of our biologics capabilities. One of the opportunities we have is we look out there and there are products that we distribute that are biologic products where we can actually bring those products in-house, many facture them ourselves with our capabilities and capture that margin.
Third, is improving inventory management. These are inventory intensive businesses as you know. There is not only a lot of cost tied up in the physical inventory itself that all instruments required to support that inventory, but there is a lot of labor cost in moving those products around and keeping track of them, so we’re looking for ways to increase that efficiency. We have improved year-over-year and we will continue to improve year-over-year in terms of our inventory management to get those overall cost down.
This year for example, we have implemented RFID technology using RFID tracking chips on sets of implants, so we know where they’re when they go out of our branch in the hospital to comeback in, it not only allows us to track that inventory better but greatly reduces the amount of labor and time involved in processing those in and out; allows us to grow volume without adding a whole lot of people as we have in the past.
And finally as I mentioned before leveraging our large sales infrastructures, so we’re predominately direct not exclusively. We will always have a mix I believe with direct and indirect sales approaches, but leveraging the infrastructure there to drive increase sales without building additional infrastructure out in the field. So that’s a part of our story in terms of driving growth and delivering leverage in the orthopedics group, I would now like to turn it over to my colleague, Tim.
Thank you, good morning everyone, it's great to be here with you today and along the same lines as David here I'll share with you I'll talk about our plans to drive sales growth and operating leverage within the areas I'm responsible for. Our efforts to drive sales growth have always begun with great sales representatives in the street, we’ve been known for having hard hitting aggressive passionate service minded sales reps who are very concerned with delivering the numbers but taking great care of their customers and patients.
As we think about growth we've been dedicated to sales force expansion each and every year within all of our growing businesses, that commitment remains and we drive territory expansion in each of our growing businesses. We also cautiously add technical selling resources as we seek to maximize the productivity of our sales organizations. These technical sales reps could be essentially associate sales reps or pure service technicians, but the whole approach is to have essentially a less expensive asset in the field, taking care of the customers, allowing the senior sales representative to spend more time selling. These approaches have been very effective for us.
Another opportunity is cross divisional collaboration and those of you who were here last night saw our six neurotech business units or franchises. And we have begun to pull them together and ask them to collaborate in the sales marketing and business development areas and begin approaching our customers in a holistic fashion. We've had some early wins, particularly within academic institutions where we can approach a chairman of neurosurgery and basically say look at all the solutions we have to offer you; they have been very receptive to that. In similar vein historically our endo instruments and medical divisions have worked very well together and have laid the sustainability solutions division in concert with endo and instruments has had a very productive collaborative approach.
Another area I'll touch on with briefly where it’s early days but we do see opportunity, particularly in our electromechanical devices, you add technologies and features across divisions, so as an example we could see embedding activity tools that could track and monitor our devices to maximize our asset management uptime and eventually communicate other equipment or other information from this equipment. So early days but we have these assets deployed and own a lot of real estate in the operating room with our electronic devices which we'll seek the leverage and drive growth in the days ahead.
We continue to focus on buying groups and IDNs, IDNs is integrated delivery networks, chains of hospitals that are connected and have joint ownership generally and we have historically been very-very strong within that surge in terms of these relationships, we have virtually all of the GPO agreements we want to have and increasingly you have the IDN agreements that are necessary. We've dedicated corporate account managers focused on the top 80 IDNs in the country and we continue to work with them on new opportunities, renegotiations in maximizing the potential of these contracts. This is a very important space in this category and again we see growing importance of the IDNs, we are well positioned to drive growth with this relationship.
Additionally, we do work to drive customer compliance, at one point we used to view these things essentially as a license to hunt, you just need to be on the contract to get into the count, over time they become, had more teeth to them, we adhere to them better, we strive to force our customers who hear them too and this ends up having a positive effect on price and the ability to execute the business in disciplined fashion.
And last we work to create new capital acquisition vehicles, within the MedSurg group we have a unit called Stryker Finance, provides leasing and other capital acquisition options to our customers and we increasingly work to match our options to their procedural volumes through such tools as fee for use, fee for disposable, fee for implant or some type of agreement where there's a service charge with a capital payment attached to that. So we have a wide range of solutions which allow our customers to acquire our products.
So we have an outstanding history of driving growth within the group and I go back to the beginning and tell you that begins with sales force and dedication to sales force expansion. You'll hear from Lonny in a bit about his efforts to drive leverage through certain parts of the P&L and the areas we control obviously our biggest line is selling expense, and so we work very hard at selling expense control and obviously as we gain scale there is some natural leverage in that selling expense line but we work hard at being disciplined and continuing to ensure we have efficient market based sales compensations, by that we want we want to be at the top end of the market, attract the very best talent, but we also want to keep our sales rep comp in check overt time. Within the group the divisions have done a nice job overtime of decreasing commission rates as the top-line grows we can still push to our reps the fact that you can make more money each and every year as our sales grow, but we want to share in our joint obligations to deliver profits of the company.
Also have been very pleased off late with commission structures that have encouraged discipline pricing practices. And by this I simply mean that historically we wanted the simplest approach. You sell x dollars, you make y percentage and we weren't any more sophisticated than that because we wanted a very simplistic approach. Increasingly over time our divisions have employed structures where we say the higher your discounts the lower your commission rate is, the lower your discount the higher your commission rate is. Very simple concept, but also very effective and it's proven to be very productive for us.
Looking at the bottom of the page in terms of cross divisional joint marketing initiatives we're working hard at synchronizing our messaging across all our divisions, we've have a marketing counsel across the company looking at branding, we have marketing counsels amongst our Neurotech group working at (inaudible) messaging and that group together. And collaborating on this messaging and bringing it all together will save money and drive the effectiveness of these efforts.
Additionally we're working at resource sharing and best practices again an example of our fierce decentralization historically within our small MedSurg group we had a different pro-care our service brand was called pro-care and we had a different approach within instruments in medical. We brought all that together under a common marketing director and now they have collaborative messaging going out for the customers at a very much more effective message.
We're working to collaborate on that med-ed medical education across our Neurotech business that you saw last night and very simply stated each of these divisions has often different focuses, some maybe focused on Neurotech residence, some were on (inaudible) some on attendings, we may be sponsoring forces put on by one of the professional societies or putting our own Stryker courses. And again by bringing our groups together we're gaining more efficient utilization of these customer touches by having more divisions represented at these areas.
The last point I would like to make and I touched on in dialog with a few of you over the years is simply that we're delighted to have the neuro bachelor division in the group and within Stryker. And you are probably aware that over the first few years it was kind of off on its own and reported up to Curt Hartman and this year we brought it into the MedSurg and Neurotech Group. So we have been able to tap into the expertise at the Neuro bachelor division and two areas I would sight is the global business unit and as a result of that they have a very disciplined product launch and product lifecycle management system, disciplined ways that they launched products around the world. We're benefiting from that expertise in striving to export it.
Additionally their clinical resources are far more expensive, they have multiple PMA devices, they have multiple ongoing studies and they are a big strong solid clinical group. So overtime as we need more evidence and discipline and we have committees at the hospitals that want evidence and are more simple old line divisions such as (inaudible) in medical, we can bring that expertise and leverage that within these other areas.
So overall again in this category we see the biggest, we have continued discipline in that selling expense line and we're optimistic at our ability to deliver our fair share of the operating leverage required in the days ahead. So with that I will pass the mic over here to Ramesh.
So good morning everybody and I'd like to add my welcome and thanks to all of you for joining us today. Over the next few minutes I will share with you the progress that we're making to deliver growth and drive operational leverage across the international market for Stryker.
One year ago I shared with you our basis for an approach to building and strengthening our international presence. So I'll start with a little snapshot of how we're set up. 18 months ago we moved to a geographic alignment. What you see for example on the left hand side of this chart in orange is our Americas division, which has Canada and the Latin American business. Under it we have Western Europe; we have Eastern Europe, Middle East, Africa which has the two priority emerging markets of Russia and Turkey within that fold. In green we have Asia Pacific which includes Australia but also the key priority markets of China and India.
Last but not least, Japan is a standalone division; we all know that Japan is the world's second largest market and a very significant and important market for Stryker as well. We have circled; on the right hand side you will those circles for Australia, Japan, Western Europe and Canada, which is what we count as our developed market. As we shared with you our strategy last year, there are different things we need to do for our presence in the developed market versus the ones in the emerging market.
Last year we talked about the developed markets and we called out a special mention our situation in Europe. You all are well aware that over the last few years the European market has been both challenging and challenged in the healthcare space in particular. On top of that, we had some of our own internal challenges around focus and execution which we called out last year. So improving market share and margins in Europe was a critical driver and is a critical driver for our long term growth for Stryker.
We did many things over the last 12 to 15 months. 15 months ago, we appointed a new leader for Europe. In turn, we have strengthened through other appointments, some of the critical leadership roles in e-markets like Germany, like Southern Europe. We’ve also installed from our U.S. teams some really experienced talented people to run the franchise strategies for Europe. We’ve done a lot of work to strengthen the team.
Another very critical thing that we did was to rebalance the country franchise focus in Europe. Overtime, we had become a much more centralized set-up in Europe where we had resources and decision and customer engagement run much more centrally than at a country level. And over time we lost the touch with the customers, we lost the execution focus. So what we’ve done is we’ve rebalanced it. We put the centralized marketing resources for example back in the country. The country managers have the resources to engage with their customers and to tactically execute with their customers the strategies that are defined for Europe. This also means that not only from a clinical perspective but also from an emerging payer perspective. So if you look at the buying groups in Germany, the Tennessee and France for procurement organizations to crop up, the countries are much better able to deal with, understand and deliver the needs of the customers in those markets.
What we don’t want to do however is loose the power of the Stryker portfolio and the franchise strength that we traditionally had. So what we are doing now is with these two franchise leaders, one for orthopedics, one for med surge get at the leadership table on the European team. So they have full accountability for the P&L across Europe and what they’re doing is driving franchise strategies, working very closely with Tim and David’s team on R&D, product launches, marketing strategies et cetera but are equal partners at the table with the country teams who have to turn around and execute those strategies.
I also talked to you last year about we see Europe as almost a tail of two half. The Southern European markets, Italy and Spain in particular, continue to be very challenging and operate with very different dynamics than the markets in Northern Europe. So what we’ve been doing over the last 12 to 15 months is really revamping our position and presence in these markets. So it’s partly a matter of redeploying some of the resources that we had in these markets to other markets, it’s revising our infrastructure but much more importantly it’s also looking at our channel and distribution management in those markets. We had a big mix of reps, distributors, agents very often there is not much clarity on what they’re doing, all the relationships they had. So we’re cleaning that up in optimizing these channels. There is a lot of work still to do but early signs are very positive and first thing I think all of you (heard) was that in the second quarter of 2013 we saw positive growth in Europe for the first time in many quarter.
What is much more encouraging for me is the fact that we’re seeing real evidence of customer conversions and competitive wins. There are many accounts that over the course of the last five years I’ve not really done any business with Stryker we’ve been kind of shot out of those. But with this new focus the ability for country teams to engage with these customers, we’re starting to see some significant wins. Still early days, but we’re seeing that. In Southern Europe for example as we revamp our distribution channels, we’re seeing distribution partners who’ve been traditionally for 10, 20, in some cases 40 years, partnered with our competitors are moving to us and want to do business with us.
So early signs and what’s important to recognize from our perspective that employee engagement and customer engagement has started to increase quite dramatically and obviously we’ll see that in the results. Lot more work to do, particularly in Italy and also in Germany but we’re optimistic that the work that has begun was going into sustained momentum and we should be able to see that at the end of the year, you’ll see that we’ve really made significant progress there.
In the other developed markets, Japan, Australia and Canada, over the years, we’ve been actually quite successful in establishing a very solid Stryker presence and market share and I shared that with you last year. In Japan, Australia, we have really very strong positions there. So these markets are also challenge with the same healthcare dynamics that are going on in Europe and other developed markets. In Australia (inaudible) and strengthen on pricing, involvement of buying groups and other people, the buying process that we have to get used to.
So we’re adapting our go to market models and some of the examples that you heard from both Tim and David. So in Japan, in Australia, in Europe, we have now put in dedicated head in next sales force for example. So the specialization team you heard from David, we're also learning from that partnering to see how effective we can be, that’s one important aspect of what we’re trying to do.
The other thing we’re doing is similar to what Tim talked about as well, we’re starting to see the proliferation of buying groups and our ability to interact and bring the best of the Stryker portfolio to these accounts is much more critical that used to be in the past and provides us leverage that we perhaps haven’t appreciated before. But the example that Tim gave you about a sales model that also looks at differentiating between pure technical support and sales, we’ve been doing that in Australia with some good success for the last few years and now we’ve got some of the Australian team working in Europe to help the European teams understand what that means, how does it work in although the different healthcare systems, how we can leverage that. I think that’s, something that’s really important.
Since January, we have a new leader in Japan, and as I said this is a big and important market for us and what we’re looking there that is we’ve got -- Japanese hospital markets incredibly fragmented, lots and lots and lots of small hospitals and we’re trying to figure out how best we deploy our resources with much more sophisticated segmentation to bring the power of the Stryker portfolio there.
Switching to emerging markets; we’ve talked to you last year about the need for us to scale up our presence in the emerging markets with the premium portfolio and that high technology that Stryker already has. We have lot of work to do there just to expand our footprint. One of the things we did was we shared with you last year, we first said we need a prioritize which markets we must win in and no surprises I guess for guessing is China, India, Brazil, Russia and Turkey.
Those are the markets in which we are putting our priority focus in terms of investment. Its basic blocking and tackling that we’ve done successfully elsewhere in the world expanding our geographic footprints. So, we’re adding reps in China for example, in Turkey we’re optimizing our distribution models to make sure we’ve got the right distribution partner. In Russia we’ve added significant amount of distribution capacity to reach broadly into Russia. We continue to invest significantly in ramp up the training and education because a lot of these markets as I said last year require market development, it’s not an established market we are going to gain share, you’ve got to create these markets and invest in building those capabilities both within the Stryker organization but also in the marketplace.
So, those are things that we know we have to do, we’ve been doing them quite well, they are absolutely on track and Bill will share with you little bit later the track record over the last five years of the emerging market growth for Stryker. I’m pleased to tell you that that growth is accelerating and what we’re seeing is that in those five markets in particular which are our focus markets, we’re seeing much higher growth in the average around emerging market which already is very strong. So, we are pleased with the progress we’re making and we are confident that we’re putting in place all the mechanisms to drive that growth.
What we also said to you last year was it won’t be enough for us to win in the premium segment. It is something we have to do but in the end it won’t be sufficient for us to achieve our aspiration of being true global Medtech leader.
So for that we identify that there was lower price segment which was not only very big but also fast growing and we didn’t really have a presence nor any real capabilities to enter that market.
So, as you all know in March earlier this year we actually closed on the acquisition of Trauson and the first three points that I just tell you or remind you what our logic and rational strategically was to do this. Trauson is a leading player in spin and trauma in China. They had a strong existing portfolio in those two areas but they also have both R&D capacities in pipeline and over the last six months we’ve actually been more impressed than we were when we -- before we bought them.
Obviously they have the manufacturing expertise and the capacity to make sure that these products are made properly with the high quality but also at the cost point. And here again, we’ve benefited from the fact that over many years we actually had an OEM relationship with Trauson and (inaudible) and this organization actually knew them very well. So, as we go in there the relationships with the people existed and we’ve had a very good understanding over their capabilities work. Obviously, they had an extensive distribution network in China. But really for us our thinking was, it wasn’t just enough to try and figure out the solution for China. We need a platform to be able to go global with this.
So, what we’re working on right now is a plan of more robust plan to say, okay now that we’ve got this platform and over the last six months the integration has gone pretty well, we’ve put in place a Stryker veteran, a business leader from our Orthopedics business in the U.S. to go to China and he’s actually running that business there, he has an extensive R&D background. So, he knows how to access the R&D capabilities in pipeline there as well.
So the integration is being going very well, we’ve been very careful to make sure that we preserve the value of what we’ve bought and make sure that we understand and maintain the differences that they bring to us. But now we’re saying we need to get this across the world, how do we think about that, what channels will be used and how do we make the plan to take this portfolio global.
The other thing is that you all know that we have a big investment and a big setup in India with a technical center and with the R&D capabilities of Trauson as a technical center in India and the links that they have with the U.S. R&D organization, how do we leverage this to continue to develop more products that are appropriate for these markets and for this segment in particular.
I think I mentioned last year, we already have about four projects that our U.S. divisions have been working on to develop products that are appropriate for this segment. So, we’re very excited about where we are with Trauson, its early days in terms of making sure we can create the value that we acquired it for. We very feeling very good about what we’ve seen since we’ve acquired it and actually frankly we've been more impressed than going in around their R&D and manufacturing capabilities.
That’s about driving growth but we’re also conscious of the fact that as we build this business we’ve got to deliver operating leverage, we’ve got to create value. Our first couple of bullets on the top I think I’ve mentioned some of it; it’s really about optimizing in commercial models. Some other terms of things that Tim talked about looking at our channels and also our resources, where do we have tech support, where do we have resources and how do we optimize that, how do we work with distributors so that we either develop a much better win-win relationship and get the customer intimacy there. Japan obviously a complex market with the fragmentation how do we improve that.
But more than that, we’re also looking at as we build scale how do we drag efficient leverage. So we don’t create infrastructure that we’re going to exit a few years from now saying now we’re going to clean that up. So working very, very closely with Lonny and he’ll talk about it some more optimizing supply lane. When you look at a market any one country that’s going to source product from multiple manufacturing sites across Stryker, how do we make that more efficient, how do we think about central distribution centers one of which we already have in Europe. How do we leverage that, how do we look at product distribution and hit management. David talked about inventory management so we have an initiative in Europe for example what we call sleeping kit. Kits that we’ve deployed into the marketplace but have kind of lost fact about what’s the rate at which that are being used and where can we redeploy them.
Particularly for the emerging market these are significant investments we have to make. In inventory you’re deploying those markets and we got to be really good at making sure that we’re getting the utilization of that quickly.
Finance, we were doing some shared service roll outs in Europe and also in Asia-Pacific and now having Bill on board with his ease and experience, hopefully we can drive that even faster. And a few other things that are on distribution optimization in China. We’re putting in a big investment in Japan to put an ERP so we can actually get our distribution in Japan much better. So from bunch of initiatives in every single market but what we’re doing is we’re starting to get much better as a team that Kevin talks about which is collaboration, whether it’s collaboration across the international businesses so that we can leverage, for example, the expertise in Australia for China or India. So we had our orthopedics leader in Australia, for example, go to India several times to we make sure we are hiring the right people developing it, so lots of examples across collaboration within international but also much more visibility and collaboration with David’s team, Tim’s team in marketing and R&D and of course with Lonny’s team. So we’re very pleased with where that’s going.
So in summary, I’ll just say we have a very clearly, that we are very focused, we have a very aligned strategy to drive international growth, both on the top line but create value for Stryker and I’m confident and optimistic that we put the things in place that we can execute like we started to do now that we can see us get significant value for Stryker on the international market.
Thank you, and with that, I’m going to turn it over to Lonny Carpenter.
Thanks Ramesh. Good morning, everyone. As always, it’s great to be with you here today and talk to you about Global Quality and Operations for Stryker Corporation. Similar to my past presentation to this Group, I really have a couple of common themes that I want to walk you through: first is our ongoing drive to enhance quality and compliance through our quality of first journey; and second, it’s really around our focus and optimizing our operations through our plant and supply chain network, both of these multiyear journeys we feel very, very good about and that we’ve made pretty significant progress.
So on a progress front; I thought I'd give you an update on where we are with the transition of moving our structure. So as a reminder if you look back at our decentralized model, the picture on the left hand side of the chart, historically, our manufacturing and supply chain functions would have reported into the commercial selling divisions. In over the course of the past 12 to roughly 18 months, we’ve transitioned into our new global manufacturing network, picture on the right hand side.
So today we’re organized into eight geographic campuses around the world. These campuses are focused on driving leverage from our core manufacturing competency process systems and expertise. This is also a scalable structure and really has allowed us to support our aggressive acquisition pace that we’ve been on and in fact we’ve brought in 15 new facilities over the course of the past couple of years into this network. Most notable has been as you’ve heard the neurovascular business coming over.
Just the last couple of months ago we finished the transition of the third and final manufacturing facility into our network, roughly about 1,000 employees with the three facilities that we brought over. In addition to supporting neurovascular business on the Boston transfer, we also have been supporting the integration of the Surpass acquisition and the Concentric acquisition where we’re been in a couple more facilities to support that. And I would submit absent this deal structure change and not share we would have been able to this complex integration with the success that we’ve been able to achieve in the last couple of years. As you’ll see evidence in the next couple of slides this global structure is now starting to drive greater operating leverage within our company while also driving top line growth.
Let’s talk about growth for just a second. Really from a global quality and operations role to drive growth is really to make sure our global customers around the world have access to the highest quality products and services and there we’re doing a good job of consistently delivering them to them at the right place at the right time. So if you start in the left hand side in terms of enabling relative to really around making sure that quality is a competitive advantage for the company and we focus right now in four main areas from a quality standpoint: first on making sure that we launch very successful new products. And as you spend time with us in the last 24 hours is seeing our products there as you looked into Tim and David and Ramesh talked about their new product launches you can get a sense that we feel very confident and a lot more I guess overall positive about the quality of our products as we launch in terms of the reliability and performance out of the gate. And it’s really a reinforcing message and encouraging that the investments that we have made over the years from a quality standpoint are really showing through in our product launches.
Second with our new structure, it really gives us a chance to leverage some of the best practices we have from a manufacturing standpoint across our network. And it’s really looking at things like automation; we have some manufacturing locations that have superior automation setup within our network. It’s a chance for us to look at one common way across all manufacturing now that drives that approach to automation to enhance quality at the same time taking across the process.
And third is about continuing on to expand our quality systems and our expectations to our supplier partners, to our key contract manufacturers and to our OEM partners to make sure from an expectation standpoint that quality whether itself Stryker as a manufacturer and one of our key partners it has the same expectation and frankly that continues to be a challenge for us as we work through those relationships.
And fourth with the integration of the acquisitions it’s really from day one to make sure we are studying in expectation and a standard from a quality standpoint that we are continuing to make a step forward, we are not going to take a step backwards from a quality standpoint, there is a same expectation. We have good plans in place to integrate and move forward in our quality assets.
And lastly on the quality and really the regulatory side as a Company more aggressively peruses globalization; our role is to make sure that we are enabling the commercialization of our products around the world with improved regulatory and registration processes.
And so giving example of again using the neurovascular business we bought that business over they sell their products in 70 different countries we had to go through and reregister and get regulatory approval for about 2,000 submissions to be able to support that business around the world. And the better we can at those processes again the quicker we can get products from market and drive growth for our business.
Moving to the left hand side, my left hand side of the supply chain optimization piece to really have a couple key initiatives going on across the Company. first is an effort around integrated business planning? You may have been familiar with what we refer to as sales and operations planning, we call it integrated business planning but it’s really around balancing our supply and demand signals and functions to make sure that we are doing a good job of managing our inventory at the same time managing our lifecycle management.
And then second, I'll just issue in logistics network, Ramesh talked about this a little bit. It’s really about setting up a global network from a logistics standpoint that is efficient customer focused and really cost effective and we have regional locations now that we are setting up around the world that will also at some point allow us to add value added services for our customers.
And third it’s about really a company wide effort and improving our inventory management and you heard David talk about this and in terms of the effort that [indiscernible] has going on same thing with Ramesh and Tim and its really this company wide focus around improving the entire management that is helping to drive some of the success that you see up here on the chart. To give you that chart in 2007 to 2011 our inventory was growing 1.5 times faster than our sales, which is a great formula for success. But you can see in the last couple of years with this increased focus on and across the company we have actually been able to keep our inventory levels flat while acquiring businesses and taking on that inventory at the same time supporting the level of sales growth you see on the chart, which is all as to reduce our days in inventory as you will hear from (inaudible) a little bit later and then also contributing to the success of the cash increase for the company.
So turning over to driving leverage and what are we doing to help contribute to that from the global quality and operations standpoint well as I have mentioned with our new structure we are really starting to see some of that come through the P&L with a number of contributing factors, one of which was the inventory chart I just showed as we get better managing our inventory a plus charges we have to take from excess are not (inaudible) standpoint. But for our network optimization focus it’s really about with those campus structures reducing our fixed overheads that we need to support those facilities. Looking at productivity improvements whether it’s lean or automation to drive labor settings throughout our network.
Looking at our sourcing opportunities again opportunities for us to look at consolidating the key vendors across the network that are going to support Stryker Corporation as opposed to one specific division and using those volumes to leverage increased savings for their suppliers and also looking at a percentage of purchases that we had as a Company in low cost areas and trying to drive that upwards which is contributing to this nice material savings for us.
Then in the warehouse and distribution cost it’s really about trying to optimize this network that we are putting in place. Looking at how we move products around the world and as Ramesh mentioned it’s not the most efficient manner of opportunities for us to look at how do we movement, it’s also opportunities to save on freight. And again looking at our international business as an example we had 30 different contracts, 30 different carriers where we were using from a freight standpoint now consolidated that don to just a few providing better service and providing some nice freight savings for us.
And lastly we are just in the process of delivering our third consecutive year of favorable standard cost rule on the cost of goods side and all these factors are really contributing to help us drive the nice expansion in gross margin if you lifted up here on the page.
And with that what does all this mean well the bottom line as we continue to be on track to achieve our previously stated cost improvement and working capital goals. We are encouraged by our progress and the quality first side and equally excited about the opportunities to drive greater operating leverage and cash flow going forward. We also know that there continues to be many headwinds facing our company and our industry that is outlined on the previous slides I believe that our structural changes that we have made are strategic directions to enable to deliver on our commitments and also prepare us and position us for the future.
With that I will now turn it over to Bill Jellison.
I would like to just on our first talking with you a little bit about kind of the overall five year performance where we have really been and keep in mind during this slide your period we actually went through obviously the worst recession in any of our lifetimes right. So when you look at the sales side of the equation throughout that five year period we still grew at a compounded annualized growth rate of 8 percentage points if you look at kind of what our core underlying growth was we grew literally around just over 5 percentage points during that same period with a couple of points each year really coming from acquisitions. When you get down to kind of what we are talking about today is not only obviously the growth side of the equation but also the leverage piece when you go into the operating margin end of the equation you can see that our compounded annualized growth rate really through that entire five year period again ended up at around 9%.
But that came from a mix of a couple of different things on a gross profit margin area we actually had some struggles we ultimately had negative product mix some acquisition mix that was negative and obviously as you are well aware some of the pricing issues within the broader base industry that we do overcome. When you look at kind of the overhead leverage that ended up during within this period we continue to actually have some positive overhead related mix within that category but we also had a lot of different cost initiatives to help drive down those costs in this period and at the end of 2012 we actually had an operating margin on an adjusted basis of 24.1%.
And when you go to the next level you are looking at obviously then the bottom-line impact, both to EPS and also cash flow into the equation and both of those categories we grew double-digit throughout this entire five-year period time up to 11% on the EPS side and still generated about 10 percentage points of compounded annualized growth throughout this entire period. The ROIC is with there as well too obviously we are well north of kind of the 20% so when we are investing our funds in our business we have great opportunities and you just heard from a number of our business leaders talking about each of their areas that they are driving both the growth and leverage on with the new organization and I think we have got plenty of very good opportunities inside the Company. So you realize that we have got an extremely strong balance sheet that we want to make sure that we are putting use as well too along with some extremely strong cash flow that we generate year in and year out a large portion of which we are still focused on investing in acquisitions.
So when you look at kind of our broader base global opportunity and our footprints here I think that this chart shows a couple of different things, one it shows that we are well positioned on a global basis. But it also shows that we have plenty of opportunity I mean we actually only have 35% of our total business on a worldwide basis outside of the U.S. and only 6% currently in the emerging market areas. And over the last five years you can see some of the growth levels there that took place on a total growth for both the United States and the international developed regions but also in the emerging market areas. So we know those markets are key to our growth and the opportunities that they provide for us and we are making investments both internally in those areas and more strategically in some of the categories where we believe that the markets over a long-term period will obviously provide us more with additional growth. That growth and the focus that we have got within those areas come from both the branding of our premium products but also making sure that we have kind of a dual branding perspective with some of the other brands that we’re picking up, most recently with the Charleston Group that we just acquired at the first quarter of this year.
When you take a look at kind of how we want to make sure that we are really optimizing our broader base shareholder return that really gets into what are we really doing at the end of the day with the cash flow that we are generating and we generate obviously a significant amount of cash flow along with an extremely strong balance sheet which I will show you some of the details on in a minute as well too. But our first and foremost priority on the utilization of that cash is on acquisitions. I mean it’s a key part of our overall growth story and we know that that’s going to be a certain portion of our growth year-over-year and we want to make sure that we're looking at a number of different opportunities throughout each and, everyone really of our broader based market segment categories to look for ways to expand. And we're looking for ways to expand both on the debt of the product offerings that we're providing as well as the debt within market related areas of those products but also to expand the broader breadth of product opportunities that we have, that are complementary for the products that we’re already in and that allows us to continue to penetrate into the Medtech area.
When you look at kind of we're driving for from an overall financial guideline on the acquisitions and again these are broad based guidelines of different acquisitions have different measurable that we look at. When you look at kind of what we're really driving for, we're looking to make sure we're at least returning kind of or looking to meet or exceed kind of the overall cost of capital that we have at least within three years of that acquisition.
And we generally want to have kind of internal rate of return targeted for those investments for at least 12.5%. And I say that typically our real targets are probably north of that, probably 15% plus. And I think as you look to level that we make an initial investment in from an acquisition. That initial investment may expect to provide us a certain level of return of what we're ultimately driving for is how do we then use the cash flow that we generate year-end and year-out within that business to reinvest in that area, to expand the sales, expand the product related opportunities for us to expand investments in R&D in those categories that ultimately at the end of the day then have we much greater return on it and have allowed us in the past to achieve these ROICs that are well north of 10% to 20%.
We also obviously as part of that three pronged approach as far as how we're optimized the shareholder return. I know you have seen kind of what we have been doing on the dividend side, we expect that we want to be growing in the future as well, our dividends at least at or slightly above our overall earnings growth year-in and year-out. And share repurchases are also obviously at least active portion of our overall utilization of the cash flow that we have as an organization. Especially when we're sitting with the amount of cash flow that we have on our balance sheet today along with the strength of the cash flow that we really deliver year in and year out in good times and in bad.
So from a year-to-date overview of highlights on kind of what's really taken place this year. I think you all have seen that our top-line sales growth has been about 3.2% in total. We have had core growth of around 4.2 percentage points year-to-date. And again if you look at kind of an adjusted growth basis, because again there is some different base kind of in the first half relative to kind of what took place, or we'll be about 4.6% we believe, on a forward basis during that first six months period of time.
Also keep in mind that within that same six months period we were still going up against some pretty hefty headwinds from our Neptune recall that we did, that actually anniversaries itself in this quarter and we would expect that reduction of that drag even though we don't have the product back in the market yet, at least on a year over year comparable basis. It's at least more comparable for us as we kind of move forward through kind of the back end of the third quarter and also into the fourth quarter of the year.
So I think what that's of really saying is that with the internal growth rates that we had in the first part of the year, we talked about kind of how the business is running, we have updated kind of the range that we have had out there associated with our sales growth. And I think that we’re confident in messages that you just heard a lot of our business units talk about today on how we can ultimately optimize our growth position within the market places, specially relative to the competitors.
When you look at kind of some of the other key highlights here, driving expansion in emerging markets obviously let by some of the activity that we just did within China, but we know the emerging market area, it's a key growth area for us. You saw the growth rates that we have had over the last five years within that category, we still are only 6% of our overall business and we should obviously be bigger than that. As an organization I think we definitely know that we want additional focus within those regions and I think we’re continually going after that.
You talked about kind of what our overall brands are outside of the U.S. Our brand and market share position are relative to kind of what they are in U.S., while we have some product categories that are very similar to kind the market share positions that we have here in States, we also have many, many different brands or products that have much lower market share positions in those markets, and we think that we can utilize the strength of those brand names along with the resources that we have to ultimately continue to grow and grow at a faster rate in many of those regions.
Europe as Ramesh mentioned obviously we actually turned the corner in more positive, at least in Q2 and one quarter doesn't necessarily make a trend. But I think that we're hearing at least some general less negative and maybe even slightly positive news from broader industries out of Europe. I think we're still in for a long haul of (inaudible) related economic issues both in U.S. as well as internationally. But I think that shows that we have right products, we're getting kind of a better baseline foundation to establish off of and we would expect those regions to be showing growth in the future.
Adjusted operating margins, again we’ve obviously been hit hard by the Medtech device tax this year. That’s obviously impacted us I think in the first half by maybe just under a 4 percentage point at our -- obviously both our gross margin area as well as our operating margin area and about maybe just over 90 basis points. If you exclude that impact for this year, we’d actually be up about 50 basis points on our operating margin this year, so we feel really good about that business or that activity despite the fact that we’ve obviously had to deal with the med tax area. Obviously if you exclude or include that, we would have actually been having a drag of about 40 basis points negative year-over-year. So we absolutely need to be making sure that we’re focused on how to make sure that we’re driving that, minimizing the impact of the tax, which I think we’ve done a good job on already. But we’re still trying to make sure that we’re making some efforts on that front and then making sure as well that we’re utilizing some of the leverage in other parts of our business to help offset it.
Strong inventory improvements over the last year if you look at kind of the second quarter to second quarter year-over-year anyways, we’re down about eight days and I think a lot of the programs that Lonny and his team as well as some of the broader based groups are working on are helping to drive those numbers down. I think it’s not just a kind of a one year plan I think that they’ve got a good outlook for a number of years still into the future on activities for us to continue to focus in that area and to improve our overall efficiencies and minimize our overall E&O that we have and are generating in the company. And then when you look at kind of what took place from an overall perspective in some of the groups, we’ve had actually double digit constant currency growth in a couple of different areas, Trauma and Extremities, Neurovascular, neuro powered instruments they’ve all performed in the double digit category in the first half of the year.
So looking at cash flow, we talked a little bit about cash flow but I think that this is really as a key slide. Again, in keep in mind that during this five year period we went through worse economic recession in any of our led times and yet if you go back to the 2008-2009 period you’ll see that our cash flow during that period actually increased in that year. We delivered 1.5 billion of positive cash flow. And so when you look at kind of industry that we’re in and the company and the diversification that we have both on a global basis but also in our product portfolio that allows us to deliver extremely strong cash flows and we obviously want to make sure that we’re efficiently using that cash flow as we move forward.
And then in the first half of the year you can see that we’re at least up about $100 million roughly in comparison to where we’re at in the first half of last year, that’s about 20% increase. And so we’re continuing to make I think some good progress on the cash flow, whether it’s up kind of that much for the full year not a different question but I think that the overall underlying team here is that year-over-year in good economic periods and in bad economic period generate a lot of cash and we’re looking to utilize that cash by investing it in areas of our business both internally and outside the organization.
From a dividend perspective, I mean, we’ve obviously jumped our dividends overall in the last few years. We’ve increased it on a compounded basis of about 38% during this period, both because of the earnings that we wanted to be returning but also a realization that we’ve got an extremely strong balance sheet. We wanted to make sure that we had a bigger component at least of our dividend that was being paid out from an overall yield on our stock and I think we positioned it relatively well. And as I mentioned earlier, you should expect that it’s still our plans to at least grow that dividend at or slightly faster than our overall growth rate and our earnings per share.
From a capitalization perspective, it’s not just the cash flow that we generate but we also obviously have an extremely strong balance sheet to work with already. We have $4.5 billion of cash sitting on our books. Our net debt or our net cash position is actually just under $2 billion. And when you look at our net cash to shareholders equity net debt equity, you’re seeing that it’s still 22% of our total equity is sitting out here in cash right now.
So we generate 1.5 billion roughly of cash per year, that means we have to not only put kind of that cash to work but potentially even more to utilize any of the cash that we’re got sitting on this balance sheet right now. So we’re in extremely good, strong financial position at this point. We are constantly obviously looking for the right opportunities and try to make good decisions associated with each one of those in a disciplined method. But as you can see that’s obviously a category that we have the capacity for and we also have the appetite for as we move forward.
Our financial targets for 2013, we’ve talked about our sales growth that we tightened the range on that towards the higher end. I think we’re very comfortable at this point a 4% to 5.5% overall core growth rates increase for us for this year. On an EPS perspective we recently gave guidance at our -- guidance at the end of the second quarter of $4.20 to $4.26, that’s actually 3.5% increase over the prior year. But again keep in mind that we’ve got a hefty drag really not just from the Medtech type device and if you just exclude that we’d be growing about 7% to 8% this year but we’ve also had obviously a fairly heavy drag from our FX related exposures this year and that’s also had a negative impact on that and we’re still delivering 7% to 8 % on bottom line return.
So, when you kind of think about (inaudible) and take a step back of what’s Stryker really is and whether you are an employee or whether you are investor, kind of investing in the company and each rolls down I think in all a half a dozen or so items of things that you would want to make sure that you’re, the company that you’re either investing in or spending a clear and has I think Stryker it goes to a team, I mean we’re absolutely a leader and a very attractive broad-based Medtech market, we’re well positioned from our geographic reach perspective with 35% of our business on an international or U.S. basis, we have extremely strong brand not just at the premium level but we’re also creating those brands at a next or mid tier level. We have products left with literally tens or thousands of different products in our portfolio, literally in kind of each one of the different areas that we kind of comparably compete in. We’re focused on innovation, we bring out new products within each one of not just a different segments for the groups that we have but also each of the different divisions that we have and that’s what really ultimately driving the growth that we’re putting on the table and saying that we believe we can grow faster than broad based competition.
We’re not sure in any specific environment what the economic market growth maybe, we’re driving for growth above our competition and I think that we’ve got capabilities on the number of fronts to be able to do that.
Strong cash flow on balance sheet, again I think that that’s unquestionable. I think that the cash flow that we generate is extremely high and even if we’re investing and getting a certain amount of growth out of acquisition every year, you can run your own multiples on what’s that needs to be to get us a certain level of return and you know that we’d have pretty solid growth on acquisitions just utilizing the cash flow that we generate every year that alone using any of the strength of our balance sheet.
Then when you look at strong returns on invested capital, obviously we’ve got great overall returns there and when we invest in our own business in R&D and kind of certain resources sales marketing related activities, those paybacks for this type of the company have great returns for us and we’re looking in a number of different areas to continue to make that. And I think we obviously are synergistic acquire on a number of different fronts, we have broad breath of portfolio, a broad geographic reach and generally if we acquire a company that’s anywhere within the mix of the products that we have, we believe we can continue to deliver synergistic benefits after that acquisition and not just benefit the acquisition that we pick up but also benefit many of the other companies that we’re linked up with.
So with that, thank you very much for coming and joining us today. I think that those were hopefully some good presentations on both the growth and the leverage aspects of our business as well as where we are financially. And we’d obviously as team like to open it up for some broader base Q&A. I’ll turn it over to Kevin first.
Thank you, Bill. So for the Q&A, I’ve invited down a number of the executive leadership teams that are seated in these chairs. And I’ll be acting as a moderator. So, if you have questions please raise your hands, we have mics that we’ll bring around to you. I’d just ask that you identify yourself and which company you’re with prior to asking the question.
Chris Hammond - Goldman Sachs
I’ve got one question for Tim and then follow up for other for Bill or Kevin whoever feels like taking it. Tim, first you talked about dedication to expanding the sales force but at the same time meaning to be able to control selling expense. I was wondering if maybe you could elaborate a little bit about some of these in the metrics or internal targets that you guys are looking to measure so that we can better understand how you’re managing those two different goals and maybe there is any type of an example how things are being, how you’re tracking performance and metrics, that will be helpful.
Well, I wouldn’t share beyond to say the numbers go up every year (on the street) and sudden sales goes down as for a selling expense and I’d be perhaps exaggerating if I gave you metrics beyond that.
What I would say is Stryker has been known for its sales forces that is absolutely a key strength of the organization and we see that across frankly all of our different divisions each one of them has different hurdle rates, different metrics in terms of when they decide to increase territory size as it is not something we really want to get into today but it’s been a hallmark of success and it’s something that we absolutely plan to continue.
Bob Hopkins - Bank of America Merrill Lynch
So, question for Bill and then or Kevin. First, Bill thanks for your presentation. I’m just curious if I was interpreting your comments correctly, you pointed out the first half growth was around that organically the adjusted 4.5%, 4.6% level. And then in your comments about some of things that happened in the second half, we’re basically saying that you expect organic underlying growth to accelerate in the second half. And then my other question for you is just on the operating margin side, obviously referred to a lot today from everybody about focus on leverage and I know there're some gross goals that you put up there, but I was just wondering if you could give us a little help as we look forward, what kind of underlying operating margin expansion you think it's possible for Stryker as we move out into the future, is this 50 to 100 basis points is it less than that is it more than that so again those are my CFO questions and then I have a CEO follow up.
From a sales perspective I think that two things, one it's clear on what our performance growth was in the first half of the year. Two it's also clear that we did have a fairly significant drag in one of our key areas with the (inaudible) of products in the first half of the year that probably ended up making that at least lower than it would have otherwise been obviously if we had year-over-year comps that were comparable, I think it’s also clear that as we got through on the second quarter and we also tightened our overall sales growth expectations for the full-year and that was slightly at least later at the bottom end of the equation to more towards the 4% to 5.5% range. So you know I would think that does that work generally more comfortable with mid range within that slightly above anyway so if market conditions stay the same then I'd say in the back about 4 to 5 months we don't have that same level of drag. But there's a number of other factors that obviously influence that. The margin side of the equation you know one we don't give any guidance out directly associated with what our expectation is on operating margins or growth margins for that matter and I think we get that really from our guidance that we provide you at least at the beginning of the year and throughout the year on both our sales growth expectations and also the EPS growth. We may give you some kind of general, kind of directional related areas on that in comparison but we really wouldn't talk about specifics. We may have some specific kind of broad-based objective specially through a three or five year strap plan but in January we provide guidance for 2014, you'll obviously see our sales growth and you'll see the leverage, and we're going to commit to you for the following year but we like to do that on a year-by-year basis.
Bob Hopkins - Bank of America Merrill Lynch
Fair enough, so Kevin on the M&A side obviously there's a discussion on it lately and you've differentiated yourself from previous Stryker management teams, like talking about orthopedic consolidation and you'd at least consider if it happened is that fair.
Absolutely, I'm certainly open to it I love our orthopedic business, seeing the growth that we’ve been able to generate over the last two years, it's a good space it's going to a good space long term with good demographics, certainly something we’d be open to, it’s something we’ve got to be very deliberate about and make sure that is makes sense as Bill mentioned we have a very disciplined approach to oppositions of our cash positions, strong cash positions but it's not putting a hole in our pockets, be very careful and thoughtful about acquisitions but it might be the right time for consolidation, something I feel urgent about at the moment, but certainly we'll see our evaluations with some of the smaller players add over time.
Bob Hopkins - Bank of America Merrill Lynch
So I guess my question really was, as it relates to both orthopedics, hips and knees, fine, I understand you don't really need to do anything given your position, I'm just curious what you think what are the hypothetical advantages that would come from being much bigger in hips or knees or considerable bigger in spine, I am just curious, what, what would that give you. Is it that you think that vendor consolidation is real and that critical mass could be more important, I'm just curious, what are the hypothetical big advantages that would come from being larger in spine or hips and knees?
I think it would (as we) went back to your comment, our customers change dramatically, hard to buy across our categories and that becomes more important than the actual differentiation within a category, that could be an (inaudible).
Bob Hopkins - Bank of America Merrill Lynch
Is that going to happen?
I don't feel that at all today, I don't feel that at all, don't have customers, customers are buying recon, and they're buying spine very separately in that they're independent public companies in spine that are actually managing to grow quite well, they don’t have hips and knees so it's not a deterrent whatsoever. Actually I'm very pleased with our spine performance, if you look at the broad-based, the bigger companies that's how other implants as well as spine, compare them to our performance we're actually going very well, both on the top line as well as from a profitability stand point, so we don’t feel hampered right now, the fact that our share is a little less, not being a deterrent to strong spine performance, so I don't feel any urgency what so ever, get large just for the sake of being large. We'll see how the market evolves certainly in the next three to two years I don’t feel that pressure, five years from now it might be different.
Bob Hopkins - Bank of America Merrill Lynch
My question also centered around M&A and I was curious obviously there was a lot of talk about it and their focus on both doing things in adjacent categories as well as the comment about focusing on the customer needs, I guess customer needs are twofold, one being things like efficiency in the (OR) or small improvements that you can make on existing products and the other area I see is unmet clinical needs. And last year you guys showed us a slide of these are things in a real house ideas that adjacent categories I'm just curious if there is any, never see that get in hot water for that one, I'm curious are there areas of unmet clinical needs that we should be thinking about or is it more of focusing on surgeon request for improvement in existing product lines. Where we see those adjacent opportunities?
You're the author of the (inaudible).
It’s on our core market and then key adjacent market, the neurovascular deal brought us and you saw last night we’re actually recalling on the lot of same customers through different offering type of the organization, but we have to expand that considerably and become the leader in global stroke care through that acquisition, so I think it doesn’t mean we’ll never go off that in going to a different sector but buying large you should expect our acquisition activity to continue to follow that blueprint because we think it is the greatest opportunity for both top line and middle of the P&L success.
What I say every one of our businesses when we do our business reviews, every one of them has a clear pathway for innovation, sometime the innovation is just making some procedure more simple more reproducible often times it has to do with being less invasive, many times it’s actually introducing procedure where they’re being done today, so a great example if you look at ischemic stroke area where it’s truly a market development play. But right now the mechanical treatment is a very-very very tiny percentage of the ischemic stroke, so in every single business area we see those kind of opportunities often times we can address that with our internal R&D and some time that requires us to go outside and do (acquisition).
Rick Wise - Stifel Nicolaus & Company
I have two questions maybe the first for Ramesh actually you’ve said that you have lot more work to do in Germany and Italy maybe you could talk a little bit more. I am going to guess that Germany is the biggest (field) of the European turnaround or improvement. Sorry I’m guessing, you can correct me please, but what’s less to do when this aspirationally where do you get your hope for the next year or two what can we expect in terms of role of the recovery, what less to do?
So obviously Germany is the biggest market in Europe and we have not had our presence strong as it needs to be and we got up to us slightly slower stock in terms of the transformation program that just a question of time and getting caught up and the last few months you’ve seen some very encouraging signs our business with Germany. Part of the challenge in Germany is that the marketplace is evolving in these buying groups. They’re also consolidating and they’re trying to figure out how to operate within this space as they consolidate both hospitals and also get bigger in terms of buying those. So, we’re trying to figure out how to best operate there so I figure on a good momentum there.
Certainly the biggest challenge for us was Southern Europe where the market has been much more challenged and our presence is quite weak in some way, and Italy is probably the one place where we still have some work to do, but we’re on track. We have got a plan. We’re tracking extremely well. Aspirationally, we need to do what everybody else and Stryker does and has done so well. We have got to outperform the competition in those markets so it really doesn’t matter. I don’t know what Europe going to grow at and longer try to be crystal ball in this 0, 2, 3 whatever it is. But we’ve got to do much better than that. We have the portfolio. We have the breadth and we should have the confidence to get there. So for me aspirationally driving higher share in the Europe at better margin is aspiration.
I think it does vary by countries so in Germany historically we just have not had a stronger presence in the recon as an example. We have strongest Spine presence not as strong in Recon. If you look at the U.K. and France we’re not very strong in MedSurg. We are very strong in Orthopedics, so it really does vary country by country but there is significantly opportunity and the fact that we had been growing slightly lower than the market. Last couple of years we’re obviously starting to address that, you saw the second quarter and certainly I don’t think everyone is feeling great about the market in Europe. Everywhere it delivered a positive growth it’s only one quarter but we feel very good about the runway, so the runway in some cases just based on history we’ve been weak in certain product categories in certain countries.
In another cases it just about execution (inaudible) done a terrific job by putting in new leader changing the operating model, so you could expect that we’ll able to grow, I expect a goal, we were called back in last October to get back to market growth by the end of this year. Obviously based on where we’re right now we’re feeling pretty about that goal and hopefully we’ll able to even surpass that and then be able grow above market rates very consistently just as we do in the United States.
Rick Wise - Stifel Nicolaus & Company
Second shorter question; I know that with Neptune orders made you recall both and my question as you were hoping (inaudible) by yearend, any update on the either one and (inaudible) possibly we get both back in ’14 that’s the right way to think about.
Actually we’re encouraged by the progress on Neptune. The outlook remains that we would likely not re-launch prior to yearend so 2014 at the earliest but we – surprise to say we’re encouraged by our progress we have had progressive discussions with the FDA and we’re optimistic that there is light at the end of the tunnel and so stay tuned but hopefully not too far. Having probably uncertain we’re working with the FDA it’s not always within our control. (inaudible) you want to make a comment?
Yes, (inaudible) I think is also involved we’re in dialog with the FDA if possible we’ll have that cleared we’ll be back on the market by the end of this year.
Derrick Sung - Sanford C. Bernstein & Co.
Thanks. Derrick Sung from Sanford Bernstein. Question for Ramesh on Trauson and then a follow up for David: on Trauson, you talked about the opportunity to after a few markets you talked about bringing, extending the portfolio with the help of some of the U.S. teams. What’s the opportunity to put that on a patent potentially bring the Trauson offering into the U.S.? Do you see an opportunity for that, do you any reach there, do you think that kind of the value offering potentially in the U.S.?
So, our priority is to get these in those markets where the segment already exists and is well proven and we got to be able to compete, almost find in markets like Brazil, India, the rest of Asia (inaudible) that’s our first priority. Now as we discussed distribution planning process with our U.S. colleagues and they start to identify possible ideas that they may need to we’re going to be collaborating much more so that we can leverage that. But we can leverage that. Our immediate priority was this was a platform to win in those emerging markets where at a certain point twice our presence is small with only 6% that’s where we’re going to go after. But obviously we won’t be creating this opportunity working with our U.S. colleagues or our European colleagues for that matter. It’s very early days I wouldn’t expect in the short.
Derrick Sung - Sanford C. Bernstein & Co.
And then a follow up for David or maybe two quick ones; one, Tim talked about sort of the changes that you were making on the commission federal side of things for the sales force in med surge. Is that something that’s translatable to orthopedics? And then secondly, we’re starting to see the on those payment kind of programs roll out across some of these hospitals. I’m just curious to get some initial feedback on any accounts that are purchasing those programs? How those discussions are going if you’re seeing changes in their behavior?
Yes, so like the MedSurg side of business we’re controlling cost of sales I think exactly what they do on that side of business and what we do will be different because the nature of selling and servicing is different in the implant business within capital employment business. We want to make sure that we have effective controls on our cost of sales at the same time we want to make sure that we have compensation programs that attract the best and the brightest because we think that’s really critically important. I think we’ll take a look at role definitions and continue to optimize how we do that. And then your second question.
Derrick Sung - Sanford C. Bernstein & Co.
On bundle payment?
Yes, I think, there is a lot of activity, a lot of conversation. I think obviously the key thing about bundle payment is getting incentives aligned between surges and hospitals focused on improving quality and drive down cost. So, it’s too soon to tell how significant that will be or how effective hospitals will be at doing. Our Stryker performance solutions division actually has service that we offer to help hospitals to put those together and create those programs. So we do think it's an important part of the future. We do think it will bring, it will increase the scrutiny on price of product offering and I think we'll probably contribute to acceleration at the recon level, potentially vendor consolidation. Hospitals move from the fixed price anybody can play to trying to go to only two or three occasionally one vendor for joint reconstruction, we like our position at that market.
Kim Galan from JP Morgan. So question I guess for Kevin or for David, just as a follow on to the hip and knee purchasing decision at the hospital level. And you guys have talked a lot about helping the hospital with inventory management, helping on the service side. So just curious what can Stryker do that you think your large competitors cannot that helps Stryker win and kind of purchase model.
I think that we can do into Kevin's point earlier we're starting to experiment in this how broad it is going to be in the next two or three years I am not sure, we do have offerings that at a procedural level we can come in and offer a combination of capital and disposables implants. So as Kevin said we don't see many customers ready to buy broadly across everything but we look at a specific procedure, whether this is fine procedure or sports medicine procedure takes on the ASC, one of the things we can do effective, we haven't seen many of the people able to do this, put together that combination of capital disposables and implants. So I think that’s one of the advantages that we have going in this environment.
The other one is service division that David mentioned, which we don't talk about a lot, the service division really does as tremendous metrics we brought Marshall Steele Company which is a small organization that has been helping hospitals improve their service line over the past four years. And the insights that we gain on that, the market insights about transition rates the readmission rates, how to run your service line is something that we're actually advising customers and we're getting paid for that.
Again we don't talk about it too much because it sort of in the early days, we created this division back in the beginning of 2011. And there are unique insights that we can bring to hospitals that don't necessarily run their orthopedics service line as official they should.
And part of that service division is a product called vendor consolidation, we help them drive towards vendor consolidation. So as we enter into engagements with customers we help them increase their efficiency and increase the performance of the service line, gives us an opportunity to point on to them ways to reduce their total overall cost through vendor consolidation. That's led to some interesting opportunities for us.
And I just have one follow-up and this is for Ramesh; just on the discussion of Southern Europe and the process that you’ve made with some of the distributers there. Similar type of question, what’s driving that? I know some of your competitors really already have this country focus model, the higher touch model, Stryker comes in, Stryker has two, Stryker is doing better but what’s driving some of these distributors that have had kind of 2013 partnerships to kind of move over in partner with Stryker?
So I think we did enjoy a very strong position in these markets some years ago and over the last few years as I said that had eroded, it eroded the confidence of our customers and our presence that maybe we’ve had surgeons even point out us saving sometime even need to realize you’re still here, so as we started to reengage our employees and the customer what we’re seeing is and breadth of portfolio the new products that we’re bringing into Europe we’re just seeing a lot higher level of engagement from customers. And looking at the breadth of the portfolio, we’re getting confidence back and our ability to service these accounts and our permanence and sustainability there.
Now, it’s not that we’ve got 100 conversions right now but it was early sign for me very encouraging that they point to potentially sustainable turn, so I think that’s happening and quite frankly I think we’re now becoming a much more attractive partner and they can see the breadth of Stryker and the long term investment we’re making some of them at least early stage.
I mean I think we are power brand with power products and we’re actually running to Europe, we’re investing in Ramesh talked about head and neck and I don’t know all of our competitors investing Europe right, so they’re looking at a company that’s actually trying to growth in Europe not running away from the Europe, so I think in certain markets that obviously creates an attractive dynamic, and obviously we need to do more the breadth and the brand Stryker has this very powerful and the fact we’re looking for growth not retrenching, can be very appealing if you’re sitting in one of these countries. Now, the Spain progress has been pretty remarkable in pretty short time and I am extremely pleased for the progress in Spain. Italy is very challenging that could take us a lot longer to really reinvent our distribution model there.
Joanne Wuensch - BMO Capital Markets
Few questions; the first is as you look into 2014 and the implementation of ObamaCare, what is you view on what it may or may not mean for its volume, maybe not initially but overtime? And the second question which may or may not be connected is, taking from a mid single digit revenue grower to into the high single digit range, what is that take is it just recovery of the market, is it the recovery of the MedSurg’s business or is there something else I’m missing? Thank you.
Okay, thanks, so on the first question, I think certainly ObamaCare in terms of patients coming into system and what it can mean to our business, we see it really as either a neutral or modest positive at the two areas that we think could benefit primarily on medical and the knee business. Medical because ObamaCare brings in real intense focus on patients’ satisfaction now obviously capital has been tight and it has been tight for the last couple of years. I don’t see that suddenly just bouncing back and spiking dramatically but by the middle of next year I think our hospitals are going to start sort of lift their heads and say, okay this isn’t so bad and we’re doing all right, and we better focus on patients’ satisfaction otherwise we’re going to get haircut on Medicare reimbursement. And that has a lot to do with patients’ satisfaction, so I think it could end up helping the debt market in general and that obviously helped Stryker.
Secondary is knee which obviously is a procedure that easier to defer than a hip or obviously a trauma procedure, which we can’t defer and there are people that have been sitting on the sidelines and all evolving waiting for one of these outlines going to come to the market. I think that we could see a positive there and it’s difficult to predict the timing, but those are two areas that I see really kind of overlying within healthcare form that could help Stryker. I really don’t see anything being significantly negative coming out right now. Our dynamics are positive. You’ve seen our growth rates in terms of getting up into higher single digit growth obviously we have exciting new technology growth as you’ve seen as we expand that and as we get into market development with our neurovascular business, those are huge markets.
As we penetrate future in extremities and as we penetrate further with international growth, those are all areas that can help lift the overall Stryker growth profile, so we really love the position that we’re in. We are obviously growing faster than our competition. We have these levers which you heard about today. We just need to pull on these levers and execute and we can drive growth certainly at the high end of Medtech and whether that gets us up into high single digit does depend a lot on the macroeconomic environment and we certainly don’t believe we can define gravity if the market staying in very-very low single digit and getting to high single digit is obviously difficult but we only expect to grow faster than the market.
Richard Newitter - Leerink Swann
Just for Kevin or Katherine. On multiple points throughout the presentations, I believe it was mentioned or there was a clear focus on leveraging clinical expertise that’s been developed or acquired through your inner acquisition or investor acquisition in orthopedic. Can you maybe talk about whether this is a sign you’re more willing to take on more clinical related projects either internally or through acquisitions and what this possibly means for the way you’re viewing product differentiation?
Okay so I’ll start the question and then actually like to turn this to our Chief Scientific and Medical officer whose is sitting at the end of the panel here. So the first thing I would say is clinical evidences demands are increasing, so even we (inaudible) with clinical evidence could become a reality in many product categories. TMA we are no longer afraid of obviously we have tremendous expertise implied through both the Neurovascular acquisition as well as the Orthovita acquisition we now have TMA experience inside the Company bringing Scott on-board is part of that is a recognition of the increased requirement and to have game changing innovation it sometimes going to require us to get into much more highly scientific areas and we certainly have an appetite for that maybe Scott you got a chance to visit all the different divisions and maybe you want to make a comment?
I would just add the color commentary that we through pockets of extraordinary capability and we have other pockets where there is opportunity to leverage either internal capability or starting with my employment and looking outside to bring in other capabilities to augment what we have we clearly recognize that there is a need to demonstrate clinical impact patient benefit and also opportunities and requirements in some places to demonstrate the economic impact and help economic benefit. So as one of my primary thrust in the Company is to evaluate where we could be most impactful across the product lines and to begin to institute programs to do so.
Matt Dodds - Citi Investment Research
It’s Matt Dodds Citi Corp. Kevin I mean for you if you listeners are getting about a lot of specialization in the U.S. in the sales force, and then internationally it sounds like there is very little a little bit ahead than that. It’s a huge dichotomy I mean why wouldn’t the international market if some of them have a more specialized sales model is that possible and what other areas do you think that you might move in to the outside of (inaudible)?
So the short answer was certainly it is possible we are going to do it head and neck here. Ramesh you want to continue?
Yes so you got to remember that in the international markets where we have been direct right not all markets are we direct, where we have been direct we have actually had pretty focused sales forces what we are learning around is particularly from the U.S. and in some cases the head and neck we started earlier in Australia for example. We are starting to recognize the sub-specialization that is going on in the U.S. is also happening elsewhere right. So we are seeing that and we are looking at the (inaudible) experience that we are specially enjoying in the U.S. and seeing if we can apply that we are looking at specific markets where that might apply more than others et cetera, et cetera. The buying decision the buying patterns may not all always be the same so that influence our choice of where it works but there no question that it can be done, it can be done everywhere it really depends on the customer base and your ability to deliver.
It does require Matt, the stomach for the initial investment right and historically we haven’t always had the stomach based on where decision making rights where in the organization. I can tell you it’s obviously the move in head and neck, its one step in that direction and we fully intend to continue that. Certainly medical, Tim has had a great experience with medical in Europe where they, it was really defocused in the past we created a dedicated specialized sales force around medical and that’s really driving terrific growth. So we do expect to continue that’s been a hallmark of our success and for many markets there is no reason why we can’t just have to get after it.
Matt Dodds - Citigroup
A quick one to Bill real quick. On the 1.5 billion in free cash flow is your mix still more U.S. than O U.S. this is the high percentage of sales in the U.S. in process?
So it’s still approximately two-thirds or real close to that outside the U.S. versus inside the U.S.
Kristen Stewart - Deutsche Bank
Thanks Kristen Stewart from Deutsche Bank. Tim and David can maybe just provide us with your I guess thoughts over the next year or so what are going to be the key products as we heard from you. Your intension to drive growth but I was wondering if you can get a little bit more specific on what might be some of the more important products we should look forward in the next maybe 12 to 18 months?
Yes in our area there is a lot of things in the book in terms of broad basings I think the I would take it back to System 7 and the 14A Camera in terms of just core drivers in our key portfolio in the neurovascular area our continued wash of the quails and the stent retrievers will also commute or drive growth in that category.
And obviously Neptune seeing that back in the market will be a key driver it’s important to note that System 7 Fortune 88 when you launch those you get two or three years pretty strong growth. I mean our camera growth has been over 10% this year and obviously we launched it in the prior year so the runway does continue on these NASA product platforms. And orthopedics?
Yes I would say in spine focused on Novel interbody devices you saw the Anchor-L device at product fare I think it’s featured in the brochure as well as our ES2 percutaneous pedicle screw system. So MIS and the Novel interbody devices those are two products that we have launched and we think that will drive in sports medicine our (inaudible) anchor and related types of products that drive innovation and growth particularly in the knee and the shoulder.
If you look at our recon business taking a look at the Triathlon platform we talked about product that we are launching this year as we look out over the horizon that you mentioned two main areas of development for us that we will be talking about in the near future one is instrumentation, procedure flow and instrumentation changes so using the existing triathlon platform but making it more efficient (inaudible) in addition we are working with a Novel surface cutting provider an alternative bearing surface that is very interesting and promising that I think will allow us to have a very unique and differentiated offering in the midterm.
One of the products that was featured in the book is the tibial base point which enables non-cemented knee, that product is actually made with 3D printing. So that’s our first product that we’re actually, we just started to do some implantations here in the United States the last month.
In June and having great success so far. And you could expect the 3D printing is going to become be the highlight that earlier on but longer term that’s really exciting potential for us and that’s really in the implant wall.
And with 3D printing, I guess, what’s the implications from a margin perspective?
Its early days that’s what I’d say, so stay tuned maybe this is our first product we’re just launching it. The potential for significant cost savings is real but it’s in industry that’s kind of in its infancy so it will take time to play out. We’ll get back to you in a little while on that.
And then one for Bill, could you just remind us where you stand on the hedging on implementation and if you’re completed there? And then also you talked about just kind of the balance sheet and the strength of it. What would be the potential that we could see Stryker do something where it would be leveraging us to better utilize your balance sheet? Whether if you were to do some sort of acceleration of our purchase program, a larger acquisition any thoughts (inaudible) in on the assets? Thanks.
Sure. On the FX side of the equation, we’ll have a hedging program. We believe to have a hedging program in place at least beginning to fill the layers up by the end of this quarter, that’s our plan. We obviously need to make sure that we’ve got that approved to the Board. However, keep in mind that as we establish a plan you’re doing layers so you’re doing layers overtime and in fact you go on as far as like 18 months out in some of those layers.
So you wouldn’t have a real multilayered quarter kind of established probably until sometime next year and actually really and fully done until in kind of the first quarter of 2015 unless we actually bump up a couple of those layers and pick up higher percentages of them early on. But we’ll at least begin the process associated with that. I think that that’s something that we’re working hard to get in place and we’d expect to have the first layers being built already this quarter.
And the leverage side, I mentioned to you before on the balance. I think we all agree that we have an extremely strong balance sheet, and we generate a lot of cash flow. I think everyone on this team is ultimately focused on best utilizing that. But the flip side is that we wanted to utilize it smartly and we’re focused on making sure that as we review different opportunities there, that’s, it's the right decision kind of for the organization. But I think that everybody realize we have a very strong balance sheet.
Thanks that makes a comfort for (Jeffrey). Thanks for taking my question. First on M&A and first (guess) I would like to take, I think I’m speaking for everyone, when I say that I’ve really enjoyed that bull’s eye chart last year.
On Bill’s comment today the general guideline that you led out around cash load generation and IR targets understanding those are guideline and seem to fit well with the examples of recent acquisitions like neurovascular in Charleston maybe more mature operating company and Orthovita on the other end of the spectrum obviously quite a bit smaller not so much on the cash generation side.
With that the representatives sort of said that we should think about in terms of the kinds of assets that you’re thinking about and specifically is there middle range there were fairly large businesses still burning fair amount of cash and might be more difficult for you to look at and that’s the one call.
So from my perspective as you kind of look at kind of where we’re investing that in the types of acquisitions, so keep in mind that the guidelines that we’ll give are guidelines for the business, so if you look in a business and there are many of them out there as well that are already well established growing at kind of mid single digit plus from a top line growth perspective already potentially generating some earnings and continue to grab up and/or fit in more nicely with same kind of niche related areas that we have so that we can maximize on it from a market synergy perspective as well as cost synergy perspective. I mean all of those are like probably (inaudible) and probably its higher end and quicker delivery on a number of those different aspect.
There is also other type of investments as well too that maybe at earlier stage as you mentioned have key technology associate with them to grow may not even be therefore two or three years, so it may still make very good sense for our organization and we’re looking at like all types of those acquisition.
We are excluded from kind of looking just certain ones, but each individual acquisition is looked at least under that general premise of what we want accomplish and if there is some special deliverable that they can bring to the organization will take those into account as we’re evaluating what the value that overall transaction that we’re going to fit on.
Just to clarify then it might it would be fair to stay larger gaps then the more important it is that is generating a fair amount of cash to drive that reinvestment.
Yes, I’d say that generally, if its larger, it’s probably again a little bit more established and it’s in its deliverable side of the equations. So, I’d say that’s probably again generally a reasonable kind.
Okay. And then on the international side, just a similar question but I know either for Kevin or for yourself, you’ve expressed this interest in getting more balanced global model in terms of the revenues you’re generating in the U.S. and overseas and I see that, we all see that the efforts that’s you’re putting into Europe and emerging markets, any (guess) to that kind of balanced organically or should we also expect more, and then more than emphasis to the acquisition overseas to how do you get there?
What I would say is, we’re not looking for some kind of magic sort of percentage of the U.S., tremendously strong U.S. business and one way to get there is to lower the growth in U.S., it’s clearly we’re not going to do.
What I would say is we have countries where we have terrific market shares like Canada and Australia, we have great presence. We have other places like Europe, like Brazil, Russia and we have Turkey where we have huge run rate for growth.
That growth for the large part given our strong product portfolio, large part of that growth can be obtained without having to go outside for acquisition that putting more feet on the streets, it’s doing that medical education, its growing it organically and frankly those markets are growing much faster than the developed worlds, so there is no reason that you saw in the last five years it grew around 16%, it outperformed. There is no reason why we can’t put (gas on the fire) there and to see grow that very, very aggressively without acquisition.
Well obviously, we’re open to acquisitions; Trauson was a big play that we made entering into brand new segment. But when we look at acquisitions we’re not really, we don’t really priorities where they are, it’s really more about what type of product portfolio are we going to add, what type of access and with case of Trauson was clearly a market access acquisition as well as product portfolio. So, to us we’re pretty agnostic about that, over time there is no doubt emerging markets this scenario is going grow faster.
So, our percentage will obviously improve from that dynamic and then in the areas were we’re under penetrated those countries like Western Europe, Germany, Italy etcetera, which add significant room to grow. It’s not necessarily going to require in acquisitions but we’ll be looking as we do always. When we do our acquisition, it’s a landscape across our technologies spend across.
Given the interesting question, I just want to do time check. We were supposed to finish at 11 o’clock which is in five minutes. We will extend the time to 11:15, hopefully that enable everyone to have their questions.
I’m just wondering if you can (jot down) and I guess the Trauma & Extremities maybe talk about what you’re most excited about within that business, whether it’s foot and ankle as I know you’ve spoken about it before. I’m just curious, what you’re real thoughts about market growth there and what you’re relative position?
There are several things, first of all the trauma, we see growth in the trauma business, it’s not a (electoral) procedure obviously, so it’s certainly not as effected by the economy as some other things are although they’re clearly has isn’t affect on economy.
I think if you look historically, particularly at the large trauma center, level one or level two trauma centers from our product portfolio standpoint, since these are really unchallenged in terms of the breadth and depth with their offering and their position was no one can cover everything like we can and that had generally been true.
We have been steadily building our product portfolio over the past decade in volume and quality and quantity to be able to compete with that so we can go into those level one and level two trauma centers and offer a breadth and depth of portfolio along with quite frankly superior on site service to compete with (inaudible) and be incredible alternative.
So, what you’ve seen is over the past year, our significant victories in that regard naturally helped us drive growth, fully we’ve got, we think a superior sales model with the great product portfolio but we are quite frankly an alternative that many hospitals and surgeons have been looking for naturally helped us win. We are cleared number two in trauma and we think there is plenty of room for us to continue to grow in that space.
If you dial it down to foot and ankle, it’s really an exciting market because the market is just growing rapidly. We’re not even sure exactly. If you look some markets you (just add up on) everybody reports and you can say how the market is growing, I mean anybody knows the real market growth rates of foot and ankle. Because procedures keep growing as we introduced new technologies, new products call on new just particularly podiatrists just more procedures keep getting done.
So, it’s not business where reps is the business where reps are open and no one else is been there and we’re getting procedures. We’re really excited about the products we have, we’re really excited about the returns that we’ve been achieving and we think we’ll continue to achieve with our dedicated foot and ankles sales force also supplemented by broad trauma and full line that add additional coverage.
I think it was 6% emerging market; you guys have like a target over sometime trying to get 10% or anything, just curious.
I’ll just go back to what Kevin just said, we don’t want to affect denominator, we want drag the numerator. So, our focus is in these markets we’re under penetrated. What do we need to do to bring the breadth for the portfolio into those markets? So, we’re investing as aggressively as we can and what we have to be sure about is that we have capabilities on the ground to leverage that investment effectively.
So it's not an issue of constraints or resource, but having the teams on the ground the capabilities, the relationship of the partners is what's going to effectively, if there is anything that's going to limit our growth is going to manage that.
So we're looking at growing significantly fast in the market, we have a catch up opportunity given our low penetration and these markets are growing very fast. I mean clearly we'd like to get a double digit and that's more representative number and some of our competitors are already at that level. They have been at it longer than we in certain markets. They also may not be performing as well as we have in United States.
In the emerging markets most companies somewhere between 20% to 40% of our growth coming from the emerging markets. Lot of those companies tend to be closer to the 40% mark, we have historically tend to be closer to 20% mark, that's going to be one of the metrics that we’re going to look at. We really are growing both in the premium segment and in the lower price segment, you would expect the percentage of our overall company grow and move closer towards that 40% and then over time obviously that will take the 6% into the double digit range.
Glenn Novarro - RBC
Glenn Novarro with RBC. Two questions, first on spine extremities you have expanded the portfolios through internal development and M&A with like with Memometal and Orthovita. When you look at the extremities portfolio are there any gaps left to be on the shoulder side or on the foot and ankle side. And the same thing on spine, are there any gaps left to really build out the spine portfolio? And then a follow up after that.
First thing I will let David answer that question but what I will tell that every company has gaps. But first point is no company has every single product tremendous strength in every single category. And just like every company we do have couple of gaps.
We always have gaps, I think if you look at extremities probably the most significant gap are sort of the upper extremities small joints, fingers wrist, elbow that's not something that we got in our portfolio, it's something that we're interested in. And if you look at shoulder joint replacement we don't yet have a reverse shoulder.
So we developed reverse shoulder the 510(k) we think reverse shoulder next year, but those are probably the most significant gap. That hasn't stopped our growth in foot and ankle and we'll continue to look at, but we think we have pretty good portfolio and I would say those are the two biggest gaps here.
And the total ankle, people comment on we don't have a total ankle as you have seen with our foot and ankle growth it's certainly throwing us down whatsoever. We don't feel a burning need, I think certainly in the next year to two years we're evaluating whether over time we’re going to need one, certainly they are very small percentage of over procedures the total ankle expectations four, five years ago, reality is even come close to what people call that market.
It's a slow market development, five years from now I would expect that we will have a total ankle, but it's not something we feel we need right now in no way constraining our growth.
Glenn Novarro - RBC
How about that same analysis for spine?
I think with spine we don't have any major portfolio gaps, I think where we need to get stronger is in minimal invasive spine particularly with (inaudible) ES2. We look at novel inter body devices improvements to our collateral access the Anchor-L Anchor-C products. So I would say those areas of novel inter body devices novel approaches and you look at pretty standard degenerative deformity cervical, posterior cervical very strong.
Glenn Novarro - RBC
And just one follow-up for international for Ramesh. Can you walk us through the strategy for knees and hips for the value segment and how important is that if you are going to grow in the emerging market?
So Trauson gives us an entry into that segment in trauma and spine. That's where we're going to build on. As we look at our internal development program as some of David's team is working on as well as some possible down the road stuff that Trauson might be able to do, we're looking at that but its early days.
Again the focus right now is working closely with David and his team globally to say what are our power brands in hips? What are our power brands in knee? (inaudible) and driving that growth from spine will be our entry to the value segment.
And the main reason for that is those are much easier procedures to perform. So the market for hip and knee and the low price segment doesn't really exist because of high touch and high service these instrumentations are complex procedures, not to say that it won't overtime and obviously it would but (inaudible) as that market potential becomes a reality obviously with procedures that are ideally less skill, we can de-skill and simplify the procedure that will be an enabler. Something that we would look forward to in the future but it's not really a viable opportunity in the near term.
Bruce Nudell - Credit Suisse
Bruce Nudell from Credit Suisse. Kevin it seems like the most price sensitive segment of your hips and knees, but you have a lot of price positive segments that are growing lot faster than hips and knees and on a corporate basis right now you are slightly negative on corporate price but why should we be thinking of Stryker as a price positive company in the coming years?
Well obviously the market for hips and knees and even spine not necessarily the orthobiologic portion, double portion of spine has been price challenged, and those price challenges we think will continue. So it's based more on the mix of our business.
As Neuro and Extremities grow at a faster clip and hips and keens than you could expect that overall price situations would improve over time. The price pressures here to say that the healthcare systems around the world are all under intense pressure.
So, we’re leaving in a world where we assume price would be lower single digit negative year after year but we clearly have some great, Tim has some great businesses where we’re actually gaining price so at least being able to hold price and it’s all about our innovation.
If we can deliver innovation we could drive our prior price but we tend to take a bit of our tempered view of this because the micro economic environment is challenging and we would want to get ahead of ourselves assume that we could be price positive. We always try to maximize our price position and over time hopefully that will be better than it has been in the past couple of years.
Bruce Nudell - Credit Suisse
And I guess my follow up is on the dividend the (inaudible) over the last six or seven years I think it is 38%. What should our anticipation be? I mean would that we have very good catch up where you could just keep leveraging that very, very strong balance sheet.
As far as dividend is concerned I think while we’ve increased that significantly over the last number of years. I think at this point we really feel that the dividend at least in comparison with the broader based net tax credit relatively well positioned maybe not totally from a strength of our balance sheet at this point, but I think that it’s in good shape.
And as I mentioned we would expect to probably increase our overall divided as we move forward over the next few years at least as fast and probably a little bit faster than our boarder based earnings growth rates but I don’t think that we believe that that (kind of a) catch up at least is necessary and hopefully we can deploy that cash a little bit more efficiently our number priority which is more focused on acquisitions, dividends are still important and as we continue to generate cash we’ll obviously make sure that we’ve good balance between that and the acquisitions along with the share repurchase.
I wouldn’t assume that 38% taken for the next six years, I think that’s a little robust even that we start from the place where we had virtually no dividends. We really did have to catch up to be able to be very competitive, we have a 2% yield mark at the time that we announced our 25% increase obviously the share prices run since then.
So, even that’s yield up around 1.6 where we’re sitting now, we see that’s in a very, very good place. And obviously continue to increase the dividend but probably had more modest rate than we have over the past six years.
Two questions for David. First on your proven designs or fund strategy for keen in the phase of two competitive, new platform launches. Can you just help us with the (review) on that strategy, one in terms of your compare with these competitive threats in terms of performance? Stryker keen franchise and then secondarily is there any change in the view, have any clinical in terms of longer term data and then also the ability for manufactures like (inaudible) to garner premium on all these platform products.
So, the middle question first. I think we are seeing a change in terms of the importance that clinicians and quite frankly hospitals are putting on clinical data improvement performance, not all new innovative products workout well and some have done actually quite poorly. And so I think there is an increased in interest in what has been proven to work from an implant standpoint.
So, I think that market situation gives us some confidence that we at trap on a 2004, we’re coming up on a decade, very, very good clinical results. We feel very good about the track on our platform. It has delivered solid results. There are some components we can add to it as I mentioned we’ve added a couple of components this year with a new force to at base plate and with the new (all polyethylene tibia) which were important.
I think as we look on revision side there are some pieces we can add to it but we have no interest or plans to change that platform. It’s not clear to me that a new product particularly in the hip and knee segment are going to drive price premiums. There was a time when there was a new technology category which met, if you launched it in the last year you can get a higher price for it.
We’re getting an often lot of pushback from hospitals, we’re not going to pay for new. We might be willing to pay more for approval but we’re not be willing to pay more for new and there could be a day we’re solid ten years with the registry results and hope you get a price (premium over something that doesn’t have) good results.
So, we feel really good, as I said before I think the opportunities for us in keens to really meet the competitive threat are really to continue to work to improve our instrumentation and our surgical approach and how we simplify the overall procedure but we don’t think we need to redesign.
Just on the U.S. hip and keen market, can you just give your outlook first where we exited in the U.S. market and first half of the year and then what's baked into overall Stryker kind of assumptions for one, market trends in the back half and then second anything for these competitive launches?
Yes I'll leave the (captain) the question about future assumptions but in terms of what we've seen you know, we've all been waiting for these patients to come back we sort of see them disappear right and it's been lumpy. There'll be a big quarter and we all think, maybe they're all coming back and then the next quarter's not a big quarter.
So we know arthritis hasn’t been cured and we know these patients need an replacement surgery, and our belief is as the economy improves and some things sort of get sorted out from the uncertainty standpoint insurance, these patients will eventually show up. I am not convinced. I used to think that there was going to be a huge bolus when there was going to be a monster year coming up to make up for it, we’ve been waiting for that for about three years and haven’t seen it. So we’re not expecting a monster year any time soon. We should see some meaningful improvement in volumes, because these patients need to (inaudible).
Unidentified Company Representative
Do you want to talk about the overall (inaudible)?
Unidentified Company Representative
I think David really just addressed it in terms of our expectations we are not baked in whether it's the back half of this year, we’re looking ahead to next year any meaningful change in the volume trends that we've been seeing recognizing there are going to be quarters when it's above and below trend line. So it's really looking at rolling four quarters what does it look like, would it surprise us, surprises us if there is a quarter or two or three where it's few points higher because of this bolus?
No, but because we haven't seen it and while we've been waiting for it, and it isn't baked into our expectations for this year and you shouldn't when we give guidance assume we're going to have any step function change in that. If it happens we're well positioned it's not like we won't be able to meet the demand given our sales force and manufacturing capabilities, but we don't think it would be prudent given that it's been elusive so far to assume we'll see it.
And what I would say it certainly haven’t lowered any updated expectations around market share in these just because we have two competitive launches and I think you've seen already year to date that we've been able to maintain in line in market performance at least despite having shade match of the market which has been a, and it’s obviously not a huge part of the market but not having our cutting blocks.
In spite of that we're still growing at market rates in the face of the two competitive launches. So there's thus far and David you could add that you seen it in the competitive launches that causes you a feel that we’ll grow below market rates.
No, I don't think so. As you pointed out Kevin for the first half of this year we're growing a little bit ahead of the market so we're holding our own despite the launch of two competitive need systems and not having shade match. But there are some, we've introduced some new products that talked about we have more products introduced, so we're confident we can continue to grow above the market.
I think we have time just for one more question, so whoever gets the mic first to ask the question.
Mike Matson - Needham & Company, LLC
All right, I guess just question for Ramesh. It's Mike Matson from Needham and Company, question for Ramesh on China, just given some of the headlines with the focus from the government there on the medical device industry, healthcare in general both on pricing and monopoly practices et cetera and then I guess as well on some of the corruption over there.
Just wondering if you could give us your thoughts on what's happening kind of at the ground level and whether or not any of this stuff could have an impact on the market growth there for any of your products? Thanks.
So in terms of the focus of the Chinese government on business practices and eventually the anti-monopoly type work that they're doing focus has been initially on pharmaceuticals and then as a related consequence comes with the good pricing. The power of the multinationals and the big Chinese players in pharma is very, very different from Medtech.
We don't actually believe that there has been any kind of abuse of pricing power in the medical device fee whether the Chinese government were want to look at that or not we don't know. From a compliance perspective obviously we're all watching whatever is happening to Glaxo and other companies very carefully.
We continuously review our own internal programs around clients and codes of conduct and business practices and so on so forth. At this time we're very comfortable that we've got the mechanisms in place to manage our business as well as we should, so we're comfortable with that but we are very conscious of what's happening in the broader market.
And even with the Trauson acquisition compliance was a major area of inspiration and we trained all of the new dealers within the first 45 days of the acquisition. So we've been all over appliances it's obviously a key risk when you are in any kind of emerging market.
We feel good about our programs and obviously something we'll continue to monitor. Let’s have the last question.
Rajbir Denhoy - Jefferies & Company, Inc.
Yes, Raj Denhoy, Jefferies. Just curious on your longer term views on your sales model, in both of the presentations began with the focus on how important sales people still were in this equation. If you think about some of the puts and takes with pricing and the way hospitals are purchasing equipment and also some of your efforts to make procedures easier over time.
How do you view the importance of having a big army of sales people going forward and is that a potential significant source of leverage for you over the next several years?
Yes, for us our first focus is growth. So wherever we can drive possible growth that's going to be our primary focus and specialized sales forces has been an engine of growth. We obviously don’t want to put extra resources where we don't need it. And if we can simplify procedures such that we don’t need to have as much of a high cost service model, we'd obviously do that. We've done that.
If you look at power tools and other areas, we have extremely efficient sales force as the devices are so intuitive they’re so easy to use that you don't have to have a salesperson there. So are really will depend on each business and for us we're not going to just want to only pursue reduction in our sales force expense at the expense of the top line.
So for us top line is paramount being as efficient and thoughtful about how we grow the top line fairly we’re doing that and you saw in Tim’s approaches around making sure that commission rates have tiered based on what kind of pricing and discount levels we get. We’re certainly going to innovate within our selling and expense line to make sure we maximize the value.
But we still see tremendous room for growth, growth in procedures but there are so many areas that are underpenetrated in terms of absolute volume, that the sales force bring extra sales force with highly confident clinical experience, actually drives growth so that’s really our primary focus versus cost which we are obviously going to do carefully.
But here we see tremendous growth and we expect to continue to drive increased sales force specialization you heard that from both Tim and David and even Ramesh, we’ll be doing that in the future.
So with that we’re going to wrap up the Q&A. I want to thank all of you for your active participation. As you can see we’re off to a really strong start this year. We’re doing, performing very, very well quarter-after-quarter operationally. You can see here the management team that we’ve assembled to strike our IPO extremely excited about.
And I certainly would hold up this management team against any of the management teams in Medtech and I’m glad you all had a chance to interact with them both last night and today.
So with that I’ll thank you. We’ll sign off on the webcast and we’ll proceed to the tours you can go out to the atrium if you’re going to participate in the tour please identify yourself and then we’ll get you on your way. Thank you.
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