Good day, ladies and gentlemen, and welcome to the Stryker 2018 Annual Meeting of Shareholders. At this time, all participants are in a listen only As a reminder, this conference call is being recorded. This presentation contains information that includes or is based on forward looking statements within the meaning of the federal security law that are subject to various risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in such statements. Such factors include, but are not limited to, to weakening of economic conditions that could adversely affect the level of demand for our products pricing pressures generally, including cost containment measures that could adversely affect the price of or demand for our products changes in foreign exchange markets legislative and regulatory actions and anticipated issues arising in connection with clinical studies and otherwise affect U. S.
Food and Drug Administration approval of new products potential supply disruptions, changes in reimbursement level from 3rd party payers, a significant increase in product liability claims, the ultimate total cost respect to REJUVIENATE an ABG2 matter the impact of investigative and legal proceedings and compliance risk resolution of tax audits the impact of federal legislation to reform the United States Health Care System changes in financial markets changes in the competitive environment our ability to integrate acquisitions and our ability to realize anticipated cost savings. Additional information concerning these and other factors is contained in our filings with the U. S. Securities and Exchange Commission, including our annual report on Form 10 ks and quarterly reports on
Form 10Q.
On behalf of the Board of Directors of Stryker, I would like to welcome you to the 39th Annual Meeting of Shareholders. I'm Kevin Lobow, and I have the privilege to serve as Chairman and CEO of Stryker. Also participating in the meeting is Dean Bergey, Vice President, Corporate Secretary. I am pleased see a number of Stryker Leadership alumni and their families in the audience. Let's please all acknowledge them with a round of applause.
You are reminded that our meeting today may include forward looking information. These factors are included in the most recent Form 10 ks and are covered by the statement that you see on the screen. So I can officially call the meeting to order. I'll ask Dean to establish that this meeting has been duly called and that a quorum is present.
Thank you, Kevin, and good afternoon. With me, I have an affidavit related to the mailing of the notice of the meeting and proxy materials on March 21, 2018, to all shareholders of record as of March 5, 2018, the record date fixed by the Board of Directors. I have a certified list of the shareholders of record
of the company as of March
5, 2018, which is available for inspection by any shareholder during and immediately following the meeting and the minutes of the 2017 Annual Meeting of Shareholders, which are also available for have been appointed to serve as inspectors of election. Based on the proxies received, the inspectors have reported to me that a majority of the 300 and 73,112,916 shares of common stock entitled to Boeing are represented in the meeting either in person or by proxy. A quorum of common stock is therefore present and the meeting may proceed.
Thank you, Dean. On the basis of the Secretary's report, this meeting is duly constituted and we're now open and ready for business. First, I will introduce the individuals who serve as directors of the corporation. They are all in attendance, and I'll ask them to stand briefly before I introduce them. So In the photo from left to right, Louise Francesconi is former President of Raytheon Missile Systems.
She chairs our Governance and Nominating Committee. Andy Silvernail is Chairman and CEO of IDEX Corporation. Andy chairs our Audit Committee. Shrikanth Attatar is the Arthur Lowes Dickinson Professor of Accounting at the Graduate School of Business Administration at Harvard University. Rhonda Stryker serves on the Board of Greenleaf Trust, Spelman College and Kalamazoo College.
She is the granddaughter of Doctor. Homer Stryker, the Founder of our company and the daughter of Lee Streicher, a former President of the company. Alan Goldston is President of U. S. Program for the Bill and Melinda Gates Foundation.
He is our Lead Independent Director. Mary Brainard is former President and CEO of Health a little bit more about Howard momentarily. Roc Delaveau is Chairman of Pierre Fabre, SA and former CEO of UCB, a global biopharmaceutical company. He chairs our compensation committee. Let's I would now like to acknowledge our longest serving director, Howard Cox, who is retiring from our Board.
Howard's tenure predates our time as a public company, whereas a member of Greylock, they made the 1st external investment in the company. As you can imagine, that investment has paid off remarkably. He has made innumerable contributions over his 44 years in helping us to set the company's direction, to make important decisions about executive leadership and perhaps most importantly, providing us expert insights as the company evaluated acquisitions throughout the years. Howard demonstrated Howard demonstrated deep caring for the organization and strove to push us higher in every interaction we had with him. In honor of his enduring impact, we have named Howard Director Emeritus.
Our Board is deeply appreciative of Howard's contributions, and we ask you all to join him in thanking him. Howard, please stand so we can recognize you. We are pleased to have identified 2 new extremely well qualified candidates for Director and nominated them for election at this meeting. I would like to introduce them as they are present today seated with our current directors. Sherry McCoy is former CEO of Avon Products and also former Vice Chair of Johnson and Johnson.
Rajeev Suri is President and CEO of Nakia Corporation. I'll now move to our leadership team. I'm really proud and honored to be able serve alongside these men and women who helped guide the Stryker Corporation. I would ask them all to stand briefly before I introduce them. In the photo from left to right, Tim Scannell has led many businesses at Stryker and is leading our med surg and neurotechnology group.
Ian Becker is responsible for public affairs and communications. She brings many years of experience in medtech. Lonnie Carpenter has been responsible for Global Quality and Business Operations, Europe and Canada Business Operations, quite a title, and has also been leading our cost transformation efforts. He now acts as Group President and Advisor to the CEO, as I will touch on shortly. David Floyd leads our Orthopaedics Group.
He has a vast experience within the orthopedics industry. B. Joy Segar is our Chief Information Officer and is modernizing all of our IT systems across the company. Glenn Bainline is our CFO and is responsible for the company's financial operations. He is a CPA with broad experience in finance and accounting.
Catherine is responsible for Investor Relations and Business Development. She was formerly a Wall Street analyst. Graham MacLean is President of Asia Pacific and he has held many leadership roles in functions and businesses during his Stryker career. Katie Fink is our Chief Human Resource Officer. She brings knowledge gained from a variety of HR roles, both at Stryker and other large multi nationals.
Mike Hutchinson is our General Counsel and he has broad legal experience both inside and outside the company. As you can see, we have a talented and experienced leadership team, which is driven to fulfill our mission. I would now like to take a moment to thank Lonnie Carpenter for his stellar 30 years with Stryker. He recently announced his plans to retire. Lonnie embodies Stryker's mission and values and has been the key architect of numerous change initiatives, including our quality program, establishment of transatlantic operating model and more recently cost transformation for growth.
His commitment to driving the cost transformation program and its sustainable impact a happy retirement right here in Kalamazoo. Let's please acknowledge Lonnie with a big round of applause. So please welcome Viju Menon to Stryker and to Stryker's leadership team. He will be responsible for running our quality manufacturing, procurement and logistics organization, taking over from Lonnie. Lonnie will be working very closely with Biju to help ensure a smooth transition.
Biju joins us from Verizon, where he served as Chief Supply Chain Officer. There, he drove significant transformations in global sourcing and operations across all of Verizon's business units. Let's please acknowledge Biju with a round of applause. Next, I would like to acknowledge our other officers: Dean Berge, Corporate Secretary Bill Berry, Controller Dean Blondie, Treasurer Irene Corby, Internal Audit Bill Symbolic, Regulatory Affairs and Quality Assurance David Ferguson, Tax and Bronwyn Taylor, Compliance and Risk Management. Let's please give them a round of of our division presidents that run our businesses from a transatlantic operating model standpoint as well as our international regions.
They are responsible really for making Stryker go and driving our business day to day. We have 2 of our Presidents here with us in the room today, Scott McNair, who runs Canada. Scott, please stand? And Spencer Stiles, who runs Global Instruments here in Kalamazoo. Also joining us today are Rich Witzel, partner of Skadden, Arp, Slate, Maran Flam, our Corporate Counsel and Chris Larsen, partner of Ernst and Young, our independent accounting firm.
We will now vote on the 3 proposals that are included in the proxy statement. Our corporate bylaws do not require motions and seconds, so the polls are now officially open for voting on these proposals. Any shareholder of record who is present may vote by ballot and if you previously granted a proxy, your vote by ballot will automatically revoke your proxy. If anyone wishes to vote by ballot, please raise your hand and one of the inspectors will deliver a ballot to you. Your ballots will be Your balance will be collected after the proposals have been presented.
If any shareholder in the room has a completed proxy in hand, it will also be collected at that time. If anyone during this voting period would like to speak or raise a question, please move to a microphone located in the aisle. Any should relate to the specific proposal being voted on. An opportunity to ask general questions will be provided later in the meeting. The first proposal is an election of 10 directors.
The nominees for election as directors are Mary Brainard, Shrikant Dattar, Roque Donahue, Louise Francesconi, Alan Golston, Kevin Lobo, Sherry McCoy, Andy Silvernail, Rhonda Stryker and Rajiv Suri. As there have been no other nominations during the designated nominating period and in accordance with our bylaws, the nominations are now closed. The second proposal to come before the meeting is ratification of the appointment of Ernst and Young LLP as the company's independent registered public accounting firm for 2018. Under SEC rules, the responsibility for appointment and oversight of the company's auditors resides with the audit committee. However, today we continue our practice of asking shareholders to ratify this appointment.
The 3rd proposal to come before the meeting is say on pay, an advisory vote to approve the compensation of the company's named executive officers as disclosed in detail in the proxy statement under compensation discussion analysis and executive compensation. All of the proposals on the agenda are now before the meeting and the polls are open. Please complete your ballot and return it to the inspectors. Proxies will also be collected at this time. The voting has ended and the polls are now closed.
The inspectors will complete the vote count and we will announce the results later in the meeting. While that is taking place, Kevin will share a view Stryker's performance and future outlook.
Thank you, Dean. So I always like to start all my business updates with Stryker's mission and values. We launched the mission and values 4 years ago and they have become really a pillar in everywhere around the world. At every location that I travel to as far away as Vietnam versus here in Kalamazoo, you see the mission and values on the walls of our buildings. And they really are the unifying force that brings together a very decentralized company.
This is our company strategy on one page. I'm not going to go through all of
the details, but what I'd strategy on one page. I'm not going to go through all of the details, but what I'd like to focus on is really the key statement at the top. It's we are driving market leading growth and aspiring for global category leadership everywhere where we play. And you can see here the 4 pillars. Customer focus is really something differentiating about Stryker that we have decentralized business units with dedicated marketing, sales, R and D and business development that intensely focused on innovating for our customers.
Innovation is the lifeblood, the second pillar of our organization. We spend about 6.5% of
sales on R and D and we also are a
very acquisitive company and we also bring in innovation via acquisitions. Globalization has been a key thrust over the past 5 years and we've made significant progress specifically in Europe, but even around the world in becoming a real global powerhouse to augment the strength that we have here in the United States. And then finally, cost transformation, which I alluded to when I was talking about Lonnie, that's been a big initiative. We're now in year 3 and really starting to deliver significant value and be able to drive operating margin expansion. On the bottom, you see the 2 sort of foundational elements of Stryker, our talent offense, our focus on people and culture, which I'll talk about a little later, the kind of accolades that we receive as a great place to work is evidence of our focus on talent and on culture.
And then quality first, we put the
Stryker brand on all
of our products as a master brand. And so we have to hold our products to very, very high standards of quality. Okay. And then, I'll just add on the time $12,000,000,000 in revenue. And you can see here, we're a very diverse company with products across 3 major segments, MedSurg, Neurotech and Spine and Orthopedics.
I love this slide. It's my favorite slide in the deck. This shows our history of growth since becoming a publicly traded company in 1979. That's 30 This is not a bad slide either. This shows Stryker's stock price for the past 5 years.
You can see that the Standard and Poor's Index had a pretty good period over that period of time at 87%. We outperformed by a very significant margin, delivering 182% growth in the stock price over 5 years. When I talked about market leading growth, this is the evidence of our market leading growth. We track our performance by division and as an overall company versus the med tech market. You could see here in each of the years 2014, 2015, 2016 and 2017, we have outpaced the market.
And the dark bar is the Stryker organic growth, sales growth. You can see that not only have we outpaced the market every year on average, a little over 200 basis points, but our own growth has accelerated each of those years from 5.8% all the way up to 7.1% organic sales growth in 2017. Leveraged earnings. So we want to be the top tier growth company. We also want to deliver leveraged earnings.
You can see in the 1st 2 years, 2014 and 2015 wasn't as strong in terms of driving the leverage. But the last 2 years, we've had terrific EPS growth, 13.3% and 11.9%. So our goal is clearly to have the dark bar be much larger than the light bar, which is the sales growth. We want to drive earnings faster than sales. And that's what we've done the last 2 years.
And based on our guidance in 2018, you should expect us to do the same thing again in 2018. Our results Q1 were recently posted 7% organic sales growth in the Q1 of 2018 despite having 1 less selling day. So if you adjust for the 1 less selling day, it's really 8% organic sales growth. We had a fantastic first quarter performance, very strong balance across businesses and geographies. And this balance is really healthy when you have all of your businesses and all of your geographies performing well.
You can weather certain storms that may occur in some businesses. And so it sets up to be a very, very successful year in 2018. Our adjusted operating margin expanded 70 basis points to 25 percent. So this focus on cost transformation is to improve our operating margin and we had a very quarter. Our adjusted earnings per share increased 13.5 percent to $1.68 which exceeded the high end of our guidance range.
So very strong Q1. This is a slide we've shown in the past. This is our long term sustainable targets. We intend to continue to grow at the high end of medtech, having organic sales growth at the high end, as I showed you in the previous bar chart. We expect to deliver 30 to 50 basis points of operating margin improvement each and every year in the future and our earnings per share growth of at least 9%.
So you saw the last 2 years, we handily exceeded 9%. We had 13.5% in the Q1. With our new guidance, we certainly expect this year we'll continue to exceed the 9%. So we set a floor for EPS as you think about the next 4 or 5 years. Looking at the guidance for 2018 percent on the Q2, we have $1.70 to $1.75 a share of adjusted earnings per share.
We revised our full year outlook. So we raised both our organic sales as well as our earnings per share. And when we started the year, we said we were going to grow sales 6% to 6.5%, which quite frankly was seen as the high end of medtech. Based on the very strong Q1, we've raised that to 6.5% to 7% for full year organic sales growth. And then our EPS at the beginning of the was $7.07 to $7.17 We've raised that based on the strong Q1 and outlook for the year to 7 point $1.8 to $7.25 Double digit growth on earnings per share is what we are now guiding to.
I talking about the setup for the year, very strong across all three of our business segments. In Orthopaedics, we have market leading growth and we demonstrated that in the Q1 with extremely strong growth with our Mako business, our knees business, our trauma extremities business far, far exceeding the market. And the strength of Mako, the 3 d printed implants, which are particularly important for cementless knees and trauma extremities. Our dedicated business unit focus has been driving double digit growth for the past 4 or 5 years. We expect those businesses to continue to have very strong year.
In MedSurg, we have tremendous momentum. MedSurg had a fabulous year last year, but it's continuing behind very, very strong new product cycle as well as acquisitions. So acquisitions Medical had a couple of big acquisitions 2 or 3 years ago. Those are now part of our organic growth and they're driving terrific growth. You've got a chance just outside this room to see the Physio Control, the automatic CPR product as one example of terrific innovation that we are able to bring in via acquisitions.
And then neurotechnology has been a growth rocket for Stryker for the past few years, grew about 20% in the Q1. And so we expect continued high growth. And spine has been a bit more of a challenged business. The market is roughly flat and we're our goal is to kind of grow in line with the market. So that's not going to be as high a growth business for Stryker, but trying to grow in line with a challenged market.
Our capital deployment strategy has been very consistent over the past 5 years. We prioritize acquisitions as the first use of our cash, then dividends growing in line roughly with EPS and then the remainder are share repurchases. So you can see here the picture from 2015 to 2017, more than 50% of the cash deployed for acquisitions. You should expect to see that same picture no matter what window of time you look at, 1 year, 3 year, 5 year. It does vary from year to year, but our goal is to spend more than half of our cash small Talking about M and A, you can see here just us, these are just a sampling of the companies that we've acquired, the larger companies that we've been acquired over the past 7 years.
You can see here 2 different colors. So most of the acquisitions we do are going to be blue, meaning they fit right into our core business. Another term for that is tuck in acquisition. So you buy a product or a technology and you tuck it right into an existing business and give it to the existing sales force. Occasionally, we'll do the other color, which I guess looks sort of like a mauve or I guess gold on the screen here.
That color is adjacencies. So adjacencies are businesses that are very close to our existing business, but they're different technologies. So Sage and Physio control are good examples where we're already in the ICU with beds and stretchers, but we didn't have the disposable products of Sage. We're already in the back of the ambulance with our powered stretchers, but we didn't have defibrillators and CPR products, that's video control. So we'd like to stay within our points and our customer points, but they're different businesses.
And so we're going to do a combination of both core business acquisitions and adjacencies. You can see Novodiac is the one that has both colors in the box. It's not a typo. So we really bought NOVADAQ for the imaging, advanced imaging, fluorescence imaging to first help surgeons see and do safer surgery. But what came along with that was a tissue business for plastic surgery for reconstruction, which is a fabulous business.
So that was both a core business acquisition and an adjacency. And then most recently, Entellus just closed in the month of March. We're very excited. That's an acquisition made by our instruments division here in Kalamazoo for minimally invasive sinus surgery. So really exciting acquisition.
So we received many accolades. It's a great place to work. They keep coming in year after year. I'm not going to talk about all of them. I'll just highlight 2.
On the bottom in the center, you see the LinkedIn acknowledgement. This is the 2nd year in a row we've made the LinkedIn list of top attractors. And LinkedIn, most people I'm sure have heard of LinkedIn, you might be on LinkedIn yourselves. They know more about companies' employees than companies do in some cases with their fancy algorithms and their deep analytics. There is no application process to be a LinkedIn top attractor.
They just mine their data by themselves and they create their own list with no input, no surveys, and it's all using their own algorithm. So to be externally acknowledged by an organization, this is across all industries, including the tech companies in the Bay Area. So it's all industries and we've made the list 2 years in a row, very excited about that. I also want to point out for the first time, we made the best workplace for women list at number 30, first time making that list. So not only are we making more lists globally, but we're also showing up as a great place to work for women, which I'm really thrilled about.
So in summary, we have a very talented and experienced leadership team. We're driving very strong organic sales growth, as you saw, commitment to continuing to deliver leveraged earnings as we did the last few years. We're going to focus on innovation and acquisitions. That is the engine of growth for Stryker. And we're going to enhance our global presence.
And this global operating model has been wildly successful in Europe, has been very successful in Canada. Nice to see Scott here from Canada with double digit growth in the Q1 and really performing very, very well. We had great performance in Japan. So we're really becoming a very strong global organization. And we're going to continue to effectively deploy voting results.
Thank you, Kevin. I am advised by the inspectors of election that each of the persons nominated for director in proposal 1 received at least 280,004 51,910 votes in favor of his or her election and therefore each has been duly elected a Director of the company. I am also advised by the inspectors of election that the shares representing a majority of the total votes cast on proposal 2 were 2018. I therefore declare that the appointment of Ernst and Young LLP for 2018 has been ratified. I'm also advised the inspectors of election that shares representing 96% of the total votes cast on proposal 3 were voted in favor of the advisory vote on the resolution relating to the company's named executive officer compensation.
The final results of the meeting will be filed on Form 8 ks with the SEC shortly and the meeting is now adjourned.
With any organization. And we ask that you grant all the speakers a courtesy of concluding their remarks without any Please feel free to proceed. If you would prefer to have a microphone brought to you, please just raise your hand.
I'm Bill Morris from Battle Creek, Michigan. I'm not affiliated, I'm a retiree. I want to thank you for another great year. $0.70 All of this is good and again, thank you. However, as a small investor, I feel limited because of the very price per share price with lows and highs of $120 to 170 per share the past several years and is both good and bad.
Great for insiders and institutions, but bad for small investors who would like to participate more than a great company, but are priced out. I strongly suggest you consider a stock split for the short term. And looking forward, I also suggest the company establish a low cost direct stock purchase dividend reinvestment plan administered by the company or transfer agents like share owner services, they have computer share. Thank you very much.
All
right. First of all, thank you for your kind words and we will take your suggestion under advisement. We'll talk with our Board about that in the future. Thank you. Other questions?
John Smith from St. John's, unaffiliated my wife and I are stockholders for over 30 years. You're dynamo.
But last year you said, I believe
that we had 250,000,000 dollars overseas. And have you decided what to do? Are you going to reward this back on this or put it to R and D?
Yes. Thank you. So obviously, there's been a big change since last year's shareholder meeting. The passage of U. S.
Tax reform has been a big change. We had a lot of our cash, about 80% of our cash had been trapped outside the United States. Now with the passage of tax reform, we will have the ability to bring back that cash. If you look back at the chart that I showed with our capital allocation, that philosophy is going to continue. What's have to borrow money every time we do an acquisition.
We'll be to borrow money every time we do an acquisition. We'll be able to use that OUS cash. But our intention is to continue with the current offense, which has been working for us extremely well and to continue to deploy capital with a priority for acquisitions, continuing a steady increase in our dividends. And then if acquisitions don't come in a timely manner because it's hard to predict, the timing expect us to continue the same game plan that we have in place right now, which I think is serving the company and the shareholders very well.
I'm Nick Tua, represent shares, I guess, at my wife's years ago. And it's appreciated much better than any diamond ring I could have given. But just one question about the 10 ks. It shows that the income tax increased like 2 80% from last year to this year. Could you add some light to that?
Sure. So that income tax increase is directly related to the passage of the tax reform. So there's a one time effect that we have, but it really gets paid over an 8 year period of time. And so that's not something that you should be too concerned about. A lot of companies have the same issue, just it's a one time issue related to tax reform.
We are going to get the benefit of lower tax in future years. Our U. S. Tax rate will drop to the 21% level. So we will get that benefit.
Overall, tax reform is fairly neutral for Stryker. We get the benefit of OUS cash, but some the favorable tax that we had from outside the United States actually goes up. And so our tax rate is going to be pretty similar, maybe a slight, slightly higher than it was in the prior year. But this is a 1 year anomaly just related to a one time accounting issue related to tax reform. It hasn't fundamentally changed.
Our tax rate is going to be in the 16.5% to 17% range year over year. And that anomaly you'll see in all companies at this stage of the game based on the timing of tax reform. Thank you. Any other questions? Okay.
Dean, anything else? Okay, great. Well, first of all, I want to thank everybody for your support of Stryker. We are proudly Michigan based and we continue to grow around the world. And we look forward to another great year in 2018 and look forward to seeing you all next year.
Thank you.