Stryker Corporation

Welcome to the second quarter, 2019, Strikers Earning Call. My name is Chantel, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Following the conference, we will conduct a question and answer session. During that time, participants will have the opportunity to ask one question and one follow-up question. If you would like to ask a question, please press star, the number one on your touchtone phone. This conference call is being recorded for replay purposes. Before we begin, I would like to remind you that the discussions during this conference call will include forward-looking statements. Factors that could cause actual results to differ materially are discussed in the company's most recent filings with the SEC. Also, the discussions will include certain non-GAAP financial measures. Reconciliation to the most directly comparable GAAP financial measures can be found in today's press release that is an exhibit to Strikers' current report on Form 8K filed with the SEC. I will now turn the call over to Mr. Kevin Lobo, Chairman and Chief Executive Officer. You may proceed, sir.

Welcome to Strikers' second quarter earnings call. Joining me today are Glenn Bainline, Strikers CFO, and Catherine Owen, VP of Strategy and Investor Relations. For today's call, I will provide opening comments followed by Catherine with an update on MAKO. Glenn will then provide additional details regarding our quarterly results before we open the call to Q&A. With organic growth of 8.5%, our Q2 results reflect excellent momentum in all three segments, med-surg, orthopedics, and neurotechnology and spine. Med-surg delivered a roughly 12% organic sales increase with strong performances across the board. Instruments had a particularly strong quarter with 17% organic sales growth, and we were pleased with the performances in medical, endoscopy, and sustainability. Looking ahead, we assume continued robust organic growth for all med-surg divisions in the second half. Orthopedics was up 6% in Q2, with hips gaining 4% and knees up roughly 6%, as MAKO robot sales and increased robot utilization across both joint applications are driving implant share gains. Neurotechnology and spine delivered 7% growth, powered by another quarter of double-digit gains in neurotechnology. We have also made considerable progress in the integration of K2M and are on track with our full year growth target for spine. On a geographic base, the U.S. was up 9% and international was up 7%. We continue to see the benefits of our transatlantic operating model with high single-digit growth in Europe. Given our lower market shares in this region, we are well positioned to continue to grow meaningfully above market in 2019 and beyond. Our international performance also included strong double-digit gains in emerging markets. With a strong top line and ongoing focus on our cost transformation initiatives, we achieved operating margin expansion of 20 basis points, which includes considerable deal-related dilution. Our adjusted per share earnings in Q2 came in at $1.98, topping the high end of our targeted range of $1.90 to $1.95, which is driven by our robust sales performance. We also continue to benefit from investments in R&D, acquisitions, sales and marketing, which translate into healthy product pipelines and strong commercial execution. That, combined with our talented employees and culture of performance, positions us well to sustain high growth going forward. With that, I will now turn the call over to Catherine.

Thanks, Kevin. My update today will focus on MAKO and the key data points that allow you to track our success in executing on our orthopedic robotics strategy. In addition, we will continue to provide our new growth, which excludes any robot revenue. As a reminder, sales tied to MAKO continue to be included in our other orthopedic revenue line, while navigation is reported in instruments. In Q2, we sold 44 MAKO robots globally, with 35 in the U.S. By comparison, in the comparable quarter a year ago, we installed a total of 39 robots, of which 29 were in the U.S. Globally, our installed base of robots is north of 700, with close to 600 in the U.S. Looking at U.S. procedures, in Q2, MAKO total needs procedures exceeded 18,000, increasing approximately 80% from the prior year quarter, while total MAKO procedures approximated 27,000. We are also pleased with the acceleration we are seeing in our hip performance. These results reflect uptake for our new 3D printed Trident II hip cups, as well as increasing utilization of MAKO for hip procedures, where we achieved strong double-digit procedure growth in the quarter. Based on these performances, it's clear we are continuing to see high demand for MAKO, given its unique features, as well as applications that span hips, knees, and uni. Combined with a robots order book, this positions us well to see ongoing success both in robot sales and recon market share gains. With that, I will now turn the call over to Glenn.

Thanks, Katherine. Today I will focus my comments on our second quarter financial results and the related drivers. We have provided our detailed financial results in today's press release. Our organic sales growth was .5% in the quarter. As a reminder, this quarter included the same number of selling days as Q2 2018. As we have said before, selling days generally do not have an impact on the performance of our capital businesses. Pricing in the quarter was unfavorable .8% from the prior year, while foreign currency had an unfavorable .6% impact on sales. U.S. organic sales growth was 9.3 and international organic sales growth was 6.5. In the U.S., there were strong performances across orthopedics, med-surg, and neurotechnology. International sales growth demonstrated solid gains in Europe, emerging markets, and Australia. Our adjusted quarterly EPS of $1.98 increased .5% from the prior year, reflecting strong drop-through on sales growth, combined with good operating expense control. Our second quarter EPS was negatively impacted by approximately 5 cents from foreign currency exchange rates, including translational and transactional impacts, which was consistent with our expectations at the start of the quarter. Now I will provide some highlights around our segment performance. Orthopedics delivered constant currency and organic growth of 5.6%, including U.S. organic growth of 6.5%. This performance was highlighted by strong performances in knees at 6.6%, hips at 5.4%, and recon capital of over 30%. Some of the key drivers of performance in the quarter included strong demand for our Mako TKA Knee Platform, 3D-printed products, and shoulder implants. Internationally, orthopedics delivered organic growth of 3.6%, reflecting strong growth in emerging markets. Med-surg continued to have strong growth across all businesses in the quarter, with constant currency growth of .5% and organic gains of 11.5%, which included a .9% increase in the U.S. Instruments had U.S. organic sales growth of 18.9%. We continue to see benefit from the Salesforce split with robust growth in power tools and waste management products. Endoscopy delivered U.S. organic sales growth of 8.2%. Endoscopy's video business grew double digits as its new 1688 camera platform continues to ramp, along with its Novadec product lines. Medical had U.S. organic growth of 11.9%, reflecting solid performance in its Bed, Stretcher, and Sage products. Within Sage, we continue to see strong demand for Prevalon and PrimaFit. Internationally, Med-surg had organic sales growth of 6.2%, which reflects strong sales in emerging markets, including China. Neurotechnology and spine had constant currency growth of .8% and organic growth of 7.4%. This growth reflects continued strong demand for our Neurotech products offset by someone's slower spine organic growth as we continue to integrate our legacy spine business with K2M. Our U.S. Neurotech business posted organic growth of .9% for the quarter, highlighted by continued strong demand for our hemorrhagic, ischemic stroke, CMF, and our neuro-powered instrument products. The spine business continued to effectively focus on the K2M integration, including the field sales organization. During the quarter, we completed activities related to product training and cross-selling. Sales exited the quarter with -single-digit growth in the U.S. Our IVS business continued to demonstrate strong double-digit growth trends. Spine remains committed to -single-digit growth for the full year. Internationally, neurotechnology and spine had organic growth of 12.4%. This performance was driven by continued strong demand across most geographies for our Neurotech products. Now I will focus on operating highlights in the quarter. Our adjusted gross margin of .8% was down 30 basis points from the prior year quarter. Compared to the prior year quarter, gross margin was favorably impacted by productivity and efficiency, which was offset by price, foreign exchange, and business mix. R&D spending was .4% of sales, which was slightly favorable to the prior year quarter. Our adjusted SG&A was .5% of sales, which was 40 basis points favorable to the prior year quarter. This improvement reflects the continued focus on operating expense improvements through our Cost Transformation for Growth program, including key projects focused on indirect purchasing and shared services. This is offset by the negative impact of acquisitions and continued planned investments in our CTG program efforts. In summary, our adjusted operating margin was .9% of sales, which was approximately 20 basis points favorable to the prior year quarter. Our operating margin reflects good leverage and continued operational savings offset by key investments and acquisitions, the latter of which had an approximately 30 basis points negative impact on the quarter. We remain confident in our ability to deliver on our full year commitment of driving 30 to 50 basis point improvement in our operating margin. Next, I'll provide some highlights on other income and expense. Other expenses decreased slightly from prior year quarter primarily due to favorable interest income. Our second quarter adjusted effective tax rate of 16% reflects our operating tax rate favorably impacted by the benefit related to stock compensation expenses. Focusing on the balance sheet, we continue to maintain a strong position with $1.8 billion of cash and marketable securities, of which approximately 40% was held outside the U.S. Total debt on the balance sheet was $8.5 billion. Turning to cash flow, our -to-day cash from operations was approximately $827 million. This reflects strong net earnings offset by increases in core working capital and planned integration costs related to K-2M. And now I will discuss our third quarter guidance. Based on our performance to date and anticipated strength in the remainder of the year, we now expect organic annual sales growth will be in the range of 7.5 to 8% for 2019. As a reminder, Q3 and the full year have one additional selling day, and Q4 has the same number of selling days as 2018. Given our -to-date performance and continuing momentum, we now expect that our adjusted net earnings per diluted share will be in the range of $8.15 to $8.25 for the full year. For the third quarter, we anticipate adjusted net earnings per diluted share to be in the range of $1.87 to $1.92. Foreign currency translation and transaction impact included in EPA-S is expected to be minimal in Q3 and negatively impacted by approximately $0.10 for the full year. And now I will open up the call for Q&A.

Thank you. We will now begin the question and answer session. If you have a question, please press star, then one on your touchtone phone. If you wish to remove from the queue, please press the pound key. As a reminder, callers will be limited to one question and one follow-up question. Your first question comes from the line of Bob Hopkins with Bank of America. Please proceed.

Hi, thanks and good afternoon. Congrats on a really strong revenue result here and strong overall. I was intrigued by your comments on hip growth and kind of the growing influence of Mako driving your hip growth. Could you just spend a second talking about the outlook for Mako in hips and, you know, is this the beginning of a stronger trend? Just trying to get a sense for where you think this is going. Thank you.

Thanks, Bob. We were pleased. We are seeing increased Mako adoption to the hip application. If some of it comes, if they start to see the benefits from knees, which could be the, in many cases, what drives the initial purchase, they start to think about using it on more procedures. So it's kind of the natural evolution of the adoption. And I think when you combine that with our 3D printed cup, it's a pretty powerful impact that we're seeing. So we think we're going to continue to see some strong gains in hips on Mako as well as obviously with knees.

Thank you for that. Then just one quick follow-up for Glenn on gross margins. Just curious if you could comment on where gross margins are going from here. I recognize that FX and MIX were the drag this quarter, but maybe you could quantify FX and just give them the really strong results. Talk a little bit about where gross margins could go over the course of the rest of the year.

Yeah, Bob, we typically don't guide on gross margin, but I'll tell you that, I mean, gross margin was negatively impacted primarily by price and product mix, especially as the business shifts towards MedSurg and Neurotech if you look at sort of the growth rates across our businesses. And then frankly on the other side, those negative impacts were offset by newly acquired businesses as the spine businesses have higher gross margins. We really expect progressive improvement in gross margin throughout the rest of this year and for the second half of 2019.

Your next call comes from the line of David Luzes with Morgan Stanley. You may proceed.

Good afternoon. Kevin, just starting with you, maybe a quick follow up. Instruments were much stronger than expected and then given that strength in 1688 in the back half for ENDO, what's driving that instrument strength and given the product catalyst for ENDO? Can these two segments deliver double-digit performance in the back half of the year?

So I wouldn't extrapolate Q2's instruments results for the future quarters. We will have a very strong instrument year overall, but it was particularly strong in Q2. We've seen this in the past where we've had, we'll call it an extra pop in one quarter, but we do expect continued strong performance and think about the 1688, it's a progressive ramp. Normally the second year of a camera launch tends to be the larger year, but we do expect ENDOSCV to also have a strong second half and it's sort of progressive. It'll progressively build related to 1688. So we're optimistic of a very strong MedSurg second half.

And then Kevin, just Neurotech, the growth's been very stable the last three quarters. Momentum slowed a bit this quarter. Your pipeline's more impactful next year, but anything that you call out either on share or market dynamics here now the first half is in? Thanks so much.

Yeah, so we're really pleased with our Neurotech business continues to roll with strong performances globally. It was a little bit softer in the US in the second quarter, but nothing particular that I'd want to call out. I would say that aspiration will be much more meaningful next year than it is this year, and I think we've talked a lot about that on prior calls. No change to that.

Your next call comes from the line of Matt Mixick with Credit Suisse. You may proceed.

Thanks so much. I also want to congratulate you on a really strong quarter. Following up on the robots in the quarter and the growth year over year, one of the questions we get often is just around how some of the other competitors in the space might be affecting decision cycles or anything like that in the field in terms of evaluations or RFPs. If you could just give us any color on that and then I have one follow up.

Yeah, thanks Matt. We have not and don't expect to see any competitive impact. As I alluded to on the call, the order book is very robust. We're seeing really strong uptake in terms of robot sales as well as the utilization rates. You can see that in some of the data points provided in the quarter. We are really pleased with what we're seeing within MAKO and the fact that we're now really starting to see indications across all the joint procedures and reconstructed joint procedures starting to see more of a lift too. Really good momentum.

That's great. Then follow up on spine. Approaching the full year cycle of this integration on the front end as you've talked about and across operations, but one of the opportunities there obviously K2 had a pretty strong 3D printed spine implant portfolio. I'm just wondering if you could talk a little bit about the opportunity or the timeline for migrating that to your platform or extending it under your umbrella or any efforts that you see as a whole. What are some of the most important opportunities to play out over the next 12-18 months?

Thanks for the question. First of all, we only closed in November of last year, so I would call it more like the half year mark right now. Very pleased with the momentum and expecting acceleration in the second half of this year now that we've trained the reps on cross selling and we continue to build the sets and the instruments needed for the K2M products for the legacy spine reps. We're excited about the outlook for the future. Certainly we had that terrific 3D printing capability and the Cascadia line of products with K2M were also, they had a very, very complete product line. We're really excited about having leadership in 3D printing and spine and we do plan to sell the full range of portfolio products as related to product and tech transfers. That's going to happen very gradually and it's not something I really want to get into on the call right now.

Thank you.

Your next call comes from the line of Josh Jennings with Cowen. You may proceed.

Hi, good afternoon. Thanks for taking the questions. I was hoping to just start on margin. I mean, clearly it's a back half weighted here year and maybe you could just help, I know you talked a little bit about it on the prepared marks, Glenn, but maybe talk a little bit about the drivers in the back half that can get you out to the 30 to 50 basis points range and should we be thinking about the lower end of that range or is there really no incremental guidance there?

Yeah, at this point I'm not going to commit to sort of a more detailed level of guidance other than to say that the 30 to 50 bits we're still sticking to that. A couple things that will help us, obviously things accelerate in the back half of the year in terms of sales and profits. We'll also start to see less integration costs coming through from K2 and more results of their operations which also should help the margin. And so those things combine really to give us confidence that we'll get to our 30 to 50 basis points.

Great. And then just to follow up on MAKO, significant success in these and sounds like KIPs are picking up. I just wanted to ask about the pipeline there and if there's nothing to share at this point, any timelines in terms of when you may share with the street other indications that are in development. Thanks again.

Yeah, thanks Josh. Nothing additional to share at this point. I think as we've talked before we're prioritizing our research efforts on new indications in spine and in shoulder, but that's a ways off. And honestly we have so much momentum right now in knees and in hips increasingly. And so the presentation is really focused on continuing to sell robots and build on that. Just really please, especially as we start to see hospitals purchasing additional robots being driven by those utilization growth rates that we're seeing. So that's going to continue to be the focus and what you're going to hear us primarily speaking about.

Your next call comes from the line of Chris Pasquale with Guggenheim. Your line is open. You may proceed.

Thanks. To start with the trauma and extremities business was a little bit softer than what we were expecting. I know last quarter you called out the T2 delay. Has that product now launched and how are you just feeling about the trauma and extremities businesses?

Yeah Chris, the product has launched and if you look at it, trauma had sequential improvement in US sales growth as sort of as those new products begin to ramp up. We also saw improvements in the supply chain which was one of the things that was slowing things a little bit. You know moving forward we expect that the sequential growth will continue to improve in the back half of the year and so we're confident that it is going to get better.

These launches just do take some time so there will be a gradual improvement in the availability of implants and instruments for the sales force. So it will progressively improve over the course of the year.

That's helpful. Thanks. And then just could you give us an update on where your cementless mix stands in need today?

Yeah, so as we indicated on the last call we're not going to give quite the level of detail. We, as you heard in my prepared comments, we've given you I think a decent amount to be able to track robots. We're continuing to see uptake for cementless. It does exceed 30% but we're not going to get much more specific than that other than to say it continues to increase.

Your next call comes from the line of Robbie Marcus with JPMorgan. You may proceed.

Great, and thanks for taking the question. Maybe I could follow up with another spine question and just ask, you know, we've seen so many integrations go by the wayside and have issues early on. What is it exactly that you're doing maybe differently? What have you learned that this integration is going according to plan?

Yeah, I think it's several factors. We spent an enormous amount of time evaluating the market, the targets and prior to making the decision to acquire K2M, we knew we had a strong cultural fit. We did a lot of due diligence around why prior deals didn't work and we also have been a very acquisitive company which has really built up that muscle around thinking about how to integrate and we also are very comfortable with hybrid sales models as opposed to some of the spine deals that forced a switch totally to direct. And so there were just a lot of lessons learned and our own core capabilities in M&A. So there's been an enormous amount of work done by the organization in the first half of this year, a lot of integration efforts, but we're really pleased and as we said, we remain on target or on track to hit our full year growth targets in the mid single digits for spine.

Thanks and maybe just one for Glen or Kevin. As you look at the med tech sector, you have plenty of balance sheet capacity to do more deals. What's your current view on the space and valuations and what are your thoughts right now on M&A versus share repurchase? Thanks.

As we've said from the beginning of being the CEO that acquisitions will be the number one priority for cash and you've seen over whatever period you want to look at three year, five year, ten year, more than 50% of our cash does get deployed on acquisitions. We still have a very robust pipeline across our divisions of active targets. Valuation is always a challenge. It's not a new challenge. It's been a challenge for the past few years and that's why, number one reason why we do walk away from deals. We'll continue to be disciplined acquirer but we right now don't see any change in our capital allocation philosophy given the robust pipeline that we currently have.

Your next call comes from the line of Vijay Kumar with Evercore ISI. You may proceed.

Hey guys, thanks for taking my question and congrats on a really nice sprint here. Kevin, maybe a big picture question on a pipeline given the strength we're seeing. What would you highlight for us when we look at the next year? I know the camera launch and some of the products you spoke about. Is there anything on Sage? I think I heard you guys talk about Sage. There's some talk about a new bed. Just help us put these new product cycles in the context of a really strong capex environment.

Yeah, I'll probably take that. I would tell you across the board whether it's 2019 or looking ahead to 2020 we have a number of product launches similar to prior years that are slated and that includes medical as well as other divisions. So I think that really is what underscores our conviction in being able to grow sales at the high end of MedTech. Don't want to get into specifics around the launches for obvious reasons but I would tell you we have a really good cadence and pipelines across all three of the primary businesses.

Yeah, so we've shown a real sustainability of growth and we've gone back four or five years and it's been steadily building and as our acquisitions roll in they roll into organic growth and that gives us the ability to continue to accelerate our growth. So right now as we sit here today I'm very optimistic thinking ahead to 2020.

And just one quick follow up. Glenn on the 3Q was there an extra day for 3Q? So I'm just curious why EPS for 3Q would step down sequentially. Is there some timing element to align items for the 3Q EPS figure?

Yeah, it's just, you know, it's a little bit of seasonality and I really don't think there's any one thing to point to relative to our guidance on Q3. And I think, you know, we'll continue with strong sales growth. We obviously took up our range in sales growth so we'll feel that come through and we feel that, you know, that level of performance on Q3 will be reflective of that sales growth. Thanks guys.

Your next call comes from the line of Joanne Wench with BMO Capital Markets. You may proceed.

Good afternoon and thank you very much for taking the question. Very nice quarter. I have a big picture question and a specific one. Big picture. Kevin, do you have an opinion on where we're going with the medical device tax?

Yeah, so obviously we're expecting that the medical device tax that will not be reinstated. It's due to be reinstated at the beginning of next year. In our strategic plan, we assume it won't be, that there'll be some, there are a number of vehicles between now and the end of the year that it could be attached to. Full repeal, I think, is probably not likely. We're hopeful and we're lobbying throughout our trade association for full repeal but there's bipartisan support both in the Senate and in the House to not reinstate the medical device tax. So I believe we'll get some type of extension whether it's two years or more. There's always a risk that it comes back but I would handicap it as a low risk right now.

Thank you. And then specific to your business, trauma and extremities, while better sequentially, is still not where I would expect it to be. What does it take to sort of move that up closer to the market rate? Thank you.

Well, certainly we're not below the market rate and we haven't been below the market rate for seven years. We outperformed the market very dramatically four or five years ago. We're not below the market rate but I would tell you that the supply chain issues that we had in the first quarter are getting better. We're not fully healthy and we have the short stem launch and shoulder as well as T2 alpha launches which are gradually building and so we do expect an improvement sequentially in Q3 and Q4 and so the result was a slight improvement from Q1 and I do expect us to continue to improve going forward.

Very helpful. Thank you so much.

Your next call comes from the line of Larry Beegelson with Wells Fargo. You may proceed.

Good afternoon. Thanks for taking the questions. One on pricing, one big picture. So pricing in ortho and med-surge got better and to a point that we haven't seen in a while. So I'm just curious why that happened, the sustainability of it and how much was just due to lapping the Japan price cuts and had one follow-up?

Yeah. You know pricing was less negative in Q2 than we've seen in recent quarters. You know I think the most sort of recent impact were felt from favorability in our implant businesses but most of that came from positive mix from joint replacement and OUS pricing and then we also saw some improvements in spine pricing but mainly because rebates have declined relative to our legacy spine business.

Thank you. Kevin, you know med-surge accelerated across all segments as you said. I'm just curious how much was driven by healthier end markets versus striker specific drivers and if you could just comment on what you're seeing just in the end markets Q2 versus Q1. It looks like Q2 may be a little more buoyant than Q1 in general. Thanks for taking the questions.

Yeah, it's a little early in the reporting cycle to comment on the full end markets. I would tell you that med-surge has historically if you look growth rates it's historically been based on our own performance. The launching of our products the debt splitting of our sales forces I look at Sage's great performance has really been after following the recalls a while back we've really gained momentum the PrimaFID launch is fantastic and going extremely well and so a number of new product launches that tends to be the reason for our success and that's not any different than the other two in the quarter but they had a sales force split at the beginning of the year and they're really performing extremely well. Thank

you. Your next call comes from the line of Pito Chickering with Deutsche Bank you may proceed.

Good afternoon and thanks for taking my questions. I wanted to follow up on the interest in growth again if you look at the stacked comps for 1Q19 versus 2Q19 it continues to accelerate can you give a little more detail on why waste management and power tools and how long this can continue?

So I think we mentioned on the prior quarter call that we split our sales force so there was one sales force selling power tools and waste management part of the catalyst for the split was the acquisition of imbuity and so that was put together with waste management and some other products and we call that part surgical technologies and then the other part is called orthopedic instruments which has the power tools bone cement the protective device the protective gowns for the surgeon and so a number of other products that are in that category two different call points and that split of the sales force is going extremely well and they have strong orders and converted those orders into strong sales in the second quarter so we do expect a continued strong performance throughout the year again I believe this was an outsized performance I wouldn't expect another number like this in the third or fourth quarter but certainly a strong number

from the acquisition perspective if you didn't have dilution from acquisitions what type of SGDNA leverage can you see when organic revenue growth is in the 7.5 to 8% range

if there wasn't if you said if there wasn't an impact from acquisitions what kind of up margin growth would we have correct yeah I mean we usually disclose that number so it really has ranged anywhere from if I add back the acquisitions 50 to even 90 basis points of up margin expansion thanks so much

your next call comes from the line of Craig Bijou with Cantor Fitzgerald you may proceed

great good afternoon guys thanks for taking the questions you called out shoulder implant growth in the script so wanted to see if you could provide a little bit more color on what drove that strength in the quarter and when you think about investment in your multiple businesses how important or how much allocation of your investment internal investment is going to the shoulder business

I think you all know that we have a very low market share in shoulder we've progressively been launching new products over the past few years so we have a primary shoulder a reverse shoulder fracture system and now a shorter stem we still don't have stemless so stemless is still in our pipeline that's coming fairly soon we also don't have a lot of international approvals for shoulder we had some regulatory challenges so this is primarily a US business right now but just on the back of these launches we've gained a lot of momentum in shoulder these are very good products and it just takes time for our sales force to be able to get that in front of customers and until you have a fairly full line we now have what I would call a full line so even though we're missing stemless we're still looking for our sales force not to be able to sell it so we've been seeing very nice uptake in shoulders over the past year or so recognizing it's still a very small business within the overall striker picture but this is something we're excited about it's a good market with a lot of growth potential and we're going to continue to focus on it

thanks and I'll stick with shoulder for my follow up just Kevin I think in the past you guys have talked about going to a specialty sales force if you have done that yet to any extent and the plans for the future if you have not

we have some specialization but I would call it modest there's obviously a huge cost burn every time you go to specialization and you have to be able to drive significant revenue we've done that in the past as I already mentioned on this call with instruments dedicating splitting the sales force and going to specialization and that's something that's been done by the same surgeons that do hips and knees you do have some upper extremity specialists but the call point is a little more fragmented so it's not as obvious to go to a fully dedicated sales force there's a huge SG&A burn to do that so I think this is one that would be a little bit more gradual where it makes sense in certain MSAs we'll go to specialized sales reps but I wouldn't call it a full

but I would call it a full your next call comes from the line of Matt Taylor with UBS you may proceed

hi thanks for taking the question excuse me so you did touch on this in an earlier question but I was hoping that you could expand on the impact the aspiration launch could have in Neuro and other pipeline enhancements that could help that business moving through this year into next

yeah with aspiration we're looking at how we get the full range of products on the market that's really what's behind our comments around thinking about that having more of an impact in 2019 so we're looking at excuse me 2020 so we're looking at launching a broader range of aspiration devices than we currently have on the market around the Q1 time frame and so that's really how you should be thinking about the impact from that

and the instruments growth was really impressive as multiple people have highlighted when you look through to next year how does the Salesforce split anniversary can you still grow strongly next year over this initial pop that you're getting

yeah I think what you're seeing is just some really strong momentum it's from the Salesforce split it's from acquisitions that have been integrated in it's from new product launches from internal innovation and R&D and all of that will continue into 2020 so I'm not going to get into specific numbers and as we've commented before this is certainly an outsized quarter so you'll want to model accordingly but there's a lot of momentum across instruments and really across the organization

your next call comes from the line of Matt O'Brien with Piper Jaffrey

hi good afternoon this is JP on for Matt I just want to touch on Spine for a second you mentioned that the K2 acquisition is kind of going as planned but I wanted to see if you could touch on first just Salesforce attrition and then for that business the Scoliosis summer months were usually pretty strong for them so maybe while we're in the midst of it comment on how you think your share is holding up in the Scoliosis side of things

yeah I think it's a little early in the reporting season you are right June tends to be a strong Scoliosis month and you heard comments from Glen and I think what we saw as we exited the quarter that really does underscore our confidence in the outlook for the full year I don't think there's anything specific to get into around Salesforce attrition one of the appeals of this target was the fact that we had a really strong cultural set we were bringing in a great leader with Eric we had minimal customer overlap and we are comfortable with and continue to be a hybrid sales model all of which were factors behind what we expected to be and we have fairly limited attrition so I think I'll just leave the comments there

that's helpful and then just one on ortho it's good all around but the US continues to outpace the OUS growth rates and just given how big the opportunity for you guys is OUS is there anything you can do to maybe on the investment side to kind of accelerate that OUS ortho growth

I think the disparity that you're seeing is really related to Mako because we've had Mako on the market for some time in the United States and we are really just launching Mako in two very important markets China and Japan we now have approval for the total knee in Japan as well as hip in China we have the hip approval we're still waiting for the total knee approval which should be coming shortly those are going to be exciting markets for us so we're just in the very very early stages of that launch so what you're seeing from a disparity from international to US is really the Mako effect and we're starting to grow as you see with our numbers we are starting to place more and more robots outside the United States but those two markets in particular just getting started and so we're excited about the future that Mako will be able to bring to those two markets

your next call comes from the line of Richard Newwitter with SBB Learing you may proceed

taking the questions I want to ask about a question asked earlier on new indications for robotics and I think you mentioned spine and then shoulder I don't want to read into this or is there anything to read into in that ordering I had the impression that shoulder would potentially be in front of spine even though you're not giving timelines precisely was there anything to that ordering and then I have a follow up on that

no just the way the words came out of my mouth nothing to that and again they're both a ways off so I wouldn't I wouldn't read anything into that

okay so I appreciate that they're both a ways off I guess you guys have been and brought the most attention to the orthopedic robotic category through Mako and you guys do not have a specific spine robotic application but you have some larger competitors some large competitors that are now coming into the marketplace some new ones as you mentioned Capsin as the orthopedic robotic market leader in spine how are the conversations going there do you feel any sense of urgency and Capsin by your last comment it sounds like no and if not why

yeah I think for us the key for our spine business was refreshing what had become a bit of a dated portfolio getting a considerably larger organization and a real strong presence with the key opinion leaders especially in the areas of deformity and the priority and what we think is imperative much like we see with Mako in need is you have to have a meaningful impact on the procedure an application that really does change the dynamic for how the procedure is done how it impacts the surgeon experience and obviously the patient experience that's what we're focused on in spine and we think there's a real opportunity there we are not seeing any pushback in terms of our spine presence by not having a robot at this point

okay thank you

your next call comes from the line of Stephen Lichman with Oppenheimer ENCO you may proceed

thank you hi guys you mentioned continued solid emerging markets growth in your prepared remarks since you are still under levered there broadly in emerging markets is that an area you've been accelerating investments and are there any particular product segments you see particularly opportunities in in emerging markets

given our presence in emerging markets we have opportunity across our portfolio and I'm really pleased with the progress we've made last year we grew double digits this year it's strong double digits and really the big change in the last let's call it six quarters is leaderships where we've really bolstered leadership in many of the countries in Brazil, in India, in China we bought out our distributor in Turkey and we're going a little bit more direct in Turkey and in these markets we're having really terrific growth so it really has been a leadership story starting with the managing director in those countries as well as the next level down and so it took us a few years to kind of get the leadership team that we wanted in place in these countries and now we're really starting to drive growth across the portfolio

thanks Kevin and Glenn just I apologize if I miss this but latest thoughts on a free cash flow conversion and tax rate for the year

yeah we if you look at sort of free cash flow and the way cash flow played out this quarter we were a little under pressured as we mentioned before with cash expenditures related to the K2 integration so we expected the first half of this year to be a little bit lower you know typically cyclically cash flow generation is always higher in the second half for us we also see you know ramping of some of our initiatives around indirect spending which will continue to deliver savings as well you know we guide in the 70 to 80 percent conversion range and we think we'll be near that range again this year and then as far as taxes there's really no change to our guidance of 16 to 17 percent although we are moderating towards the lower end of that range

your next call comes from the line of Raj Dhanoi you may proceed

Hi good afternoon maybe one for Katherine just around Mako you know I'm curious when you think about the overall US knee market maybe being in the very very low single digits you guys going six and a half seven percent of that delta can you break out what percentage you think is pure kind of volume share gains versus you know any uptick you guys are getting any mixed benefit price benefits you're getting from using robotics

yeah that's difficult to parse out I mean I would tell you the bulk of it is coming from volume and market share gains we're selling a significant percent of our robots into competitive accounts obviously because we wouldn't be able to grow at these rates if it was all into striker accounts but we do get some modest mixed benefit but it's really it's powered first and foremost by Mako as well as our 3D printed products having them indicated our cementless knee indicated on the Mako robot is a pretty powerful combination but trying to break it down with specifics that's just really challenging

okay but your point is that it is mostly share gains though that's the real big delta it's not any mixed benefit you're

getting emphatically

okay and then just you know on those lines I think the question was asked earlier but you know you now have a kind of major launcher at least a launcher for a major company you know within those accounts have you seen within the Zimmer accounts has there been any change in tone of those customers being willing to entertain use of Mako or just really any change in the market broadly as it gets more competitive

yeah I would tell you when we look at the performance in the core I think it's just simply too soon we are not seeing a competitive impact I think our results really do underscore just how strong our momentum is with robots we have a very large installed base those questions probably better directed at them because obviously they're going to have better insights

your next call comes from the line of Jeff Johnson with Baird you may proceed

thank you good afternoon Kevin understanding your China presence is relatively modest any updates or color you can provide on maybe gating of procedural demand or demand for capital in that market just given some of the macro uncertainty here recently

well you're right I think you're being generous by saying we have a modest presence we have a long way to go in China it's really the most important of the emerging markets and given our presence we're really seeing Striker being the rate limiting factor not the market the market conditions are still for health care very good and we just have to raise our game and which we've been doing over the last two years and really excited about the leader that we have there but I don't see anything in the market that should cause us to slow down our momentum given where we are right now

all right great and I think the last question you mentioned spine rebates coming down is one of the helpful factors on pricing in the quarter I just want to is that an industry wide comment do you feel or is that a mix shift from older Striker product to the K2 products that's helping that just wondering if it's more Striker specific that commentary or broader market commentary thank you

yeah it's really the result of sort of our integration efforts and really a planned mix shift to the K2 products that we see really causing that impact thank

you your next call comes from the line of Ryan Zimmerman with BTIG you may proceed

great thanks for taking the question Catherine you called out utilization up 80% in needs on MAKO and I'm just wondering if you could speak a little bit to the disparity between users maybe what you see from the top users and how much of the install base has capacity in terms of further utilization or further optimization on those robots

yeah so the 80% reference the total need procedures that were done in the quarter it's very difficult to give you a color around that I mean we see adoption really across the board high volume hospitals, lower volume rural, urban teaching hospitals it really it's driven first and foremost is there a robotic champion in that hospital and that's what drives the placement or the sale of the robot

okay that's helpful and then we've been asked a little bit before but as a competitor does come into the market how is the guidance contemplating the sales cycle for MAKO or what's the thoughts around an elongation of the sales cycle just given what we're seeing maybe in the spinal robotics market with an elongating sales cycle do you anticipate that for the maybe the remainder of the year or potentially in the 2020 thank you

yeah I think it's simply too soon we're not sure on that launch and so I think it's simply too soon so as we get closer to 2020 we'll certainly contemplate that but I think as you can see from our guidance there's just a lot of momentum across the board and that we're just not seeing any impact

your next call comes from the line of Kyle Rose with Canaccord you may proceed

great thank you for taking the question just wanted to ask another one on MAKO a lot of focus obviously on the competitive launch have you seen any changes as far as how hospitals are looking to acquire and pay for them I know you've talked about your Flex Financial in the past but are you seeing any that are looking more for utilization based agreements and things along those lines

no Flex Financial has for years been a powerful tool for us when we're selling capital and we can contemplate different models based on what may be capital budgets versus operating budgets and leasing etc so we can look at a number and continue to look at a number of different models but I wouldn't say those comments aren't any different today than they would have been a year ago

and then the one follow up is just the outpatient market both for MAKO on the total knees and total hips but then also more broadly from an orthopedic joint replacement perspective what are you seeing in the dynamics of that market

specifically in the dynamics of the MAKO uptake in hips and knees

yes in the outpatient environment

you know we do sell some robots in the outpatient it's the minority they obviously have a keen interest in it because the outpatient hospital or ASC they like the new technology and obviously we're seeing more and more evidence of the impact this has for patients and outcomes that drives their interest they have different capital challenges and so again we use FlexFinancial to work with that but the vast majority of the robots are not in the outpatient setting they're still in the hospital based setting at this time

there are no further questions at this time I will now turn the conference over to Mr. Kevin Lobo for closing remarks

thank you for joining our call as you can see we had very strong Q2 results and strong momentum going into the back half of the year we look forward to sharing our Q3 results with you in October thank you

thank you ladies and gentlemen this concludes today's conference thank you for participating you may now disconnect