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spk07: Welcome to the second quarter 2021 Striker Earnings Call. My name is May 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 then one on your touchstone 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. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release that is an exhibit to Stryker's current report on Form 8K filed today with the SEC. I will now turn the call over to Mr. Kevin Lobo, Chairman and Chief Executive Officer. You may proceed, sir.
spk05: Welcome to Stryker's second quarter earnings call. Joining me today are Glenn Bainline, Stryker's CFO, and Preston Wells, Vice President of Investor Relations. For today's call, I'll provide opening comments, followed by Preston with an update on the right medical integration. Glenn will then provide additional details regarding our quarterly results before opening the call to Q&A. Please note that our press release contains our results versus both 2020 and 2019. For this call, our commentary will be based on our performance versus 2019, which we believe provides a more relevant point of comparison. For the quarter, we posted organic sales growth of 9.3%, reflecting growth versus 2019 for all our major businesses. This strong result was driven by standout performances from neurovascular, Mako, emergency care, sports medicine, and our U.S. shoulder and total ankle products. Each of these posted very strong double-digit growth. International organic growth outpaced the U.S. at 14.2% despite COVID challenges in some countries. We posted double-digit growth across in most regions, including excellent results in South Pacific, China, Canada, South Korea, and many countries in Western Europe. We were also pleased to see the continued rebound in elective procedures, as both hips and knees saw quarter over quarter sequential improvement, and both returned to growth. Also, now that we have a fuller appreciation of Wright Medical, we are delighted to have it within the Stryker family. With our first half organic growth of 7.1%, combined with continued recovery of electric procedures, a strong order book across our capital businesses, and new product innovations, we have increased confidence in the full-year outlook. This is reflected in our upward narrowing of organic sales guidance to 9% to 10% compared to 2019. Our sales performance carried through the rest of our results with strong margin performance, and adjusted EPS growth, and cash flow conversion of over 100 percent in the quarter. Through the remainder of the year, we do expect a disciplined increase in spending to support our future growth expectations. Our bullish sales outlook, combined with ongoing execution on margins and continued progress on rate medical integration, has resulted in a raised full-year adjusted earnings per share guidance of $9.25 to $9.40 a share. I continue to be impressed with the resiliency of our people and culture, which positions us well for a successful 2021 and beyond. I will now turn the call over to Preston.
spk06: Thanks, Kevin. My comments today will focus on the second quarter performance of our combined trauma and extremities business, including an update on the ongoing integration of Wright Medical. During the quarter, our combined worldwide trauma and extremities business, including Wright Medical, had a strong performance, growing 7% compared to 2019. The performance in the quarter was driven by double-digit growth in our U.S. trauma and upper extremities businesses. U.S. businesses were benefited by the recovery from COVID-related restrictions, which continues to outpace the rest of the world, as well as the ongoing execution of the U.S. selling integration. The trauma business unit was positively impacted by the reopening of economies and the continued strong performance of key products, including T2-alpha and the mini-frag plating system. Our U.S. upper extremities business, which remained number one in shoulder arthroplasty, grew strong double digits in the quarter behind continued strength within reverse arthroplasty portfolio with perform reverse and revision driving the growth. The upper extremities performance in the quarter was enhanced by the continued adoption of our Blueprint planning software with approximately 50% of total shoulder cases completed using Blueprint. As a result of the strong performance of our trauma and extremities business, which grew approximately 5% in the first half of the year, we are confident in the combined business to grow at least 6% for the full year when compared to 2019. We are now about nine months into the integration of Wright Medical, and we remain very pleased with the progress and efficiency at which the team is moving through the integration. The U.S. integration is pacing ahead of our expectations, and cross-selling has begun in a limited capacity. We expect to continue to execute on our cross-selling priorities during the second half of the year as we work to fortify the supply chain and processes to support cross-selling activities. Outside the US, the teams have successfully executed integration plans in several key markets, including the UK, Germany, France, Japan, and China, with further countries to follow into 2022. In addition to the commercial activities, we are also executing on the integration of other operational areas, including the consolidation of distribution and sales offices, harmonization of key operational processes, and executing on our manufacturing site strategy. Within R&D, the team also continues to make progress on aligning the long-term portfolio, pipeline strategies, and harmonized design processes. While the team has moved through the integration, they have also remained focused on executing the critical existing projects in the pipeline. This includes the recent launch of the new Tournier Perform Humeral System, which offers clinical solutions for the simplest and most complex arthroplasty procedures and delivers on our mission to make healthcare better for surgeons and the patients they serve. With that, I will now turn the call over to Glenn.
spk03: Thanks, Preston. Today I will focus my comments on our second quarter financial results and the related drivers. Our detailed financial results have been provided in today's press release. As a reminder, we are providing our comments in comparison to 2019 as it is a more normal baseline given the variability throughout 2020. Our organic sales growth was 9.3 in the quarter. The second quarter included the same number of selling days as Q2 2019 and Q2 2020. Compared to 2019, pricing in the quarter was unfavorable 0.6%. Versus Q2 2020, pricing was 0.5% unfavorable. Foreign currency had a favorable 1.5% impact on sales. During the quarter, we saw a recovery ramp of elective procedures and accelerated sales momentum as the impact of the COVID-19 pandemic has eased in most geographies. However, the recovery ramp of elective procedures continues to be variable by region and geography and has a more pronounced impact on our orthopedic and spine implant businesses. For the quarter, U.S. organic sales increased by 7.5%, reflecting the recovery of our procedural business and continued strong demand for Mako, medical products, and neurovascular products. During the quarter, we had strong sequential improvement in all our U.S. businesses. International organic sales showed strong growth of 14.2%. Our adjusted quarterly EPS of 225 increased 13.6% from 2019, reflecting sales growth and operating margin expansion partially offset by higher interest charges resulting from the right medical acquisition and a somewhat higher quarterly effective tax rate. Our second quarter EPS was positively impacted from foreign currency by 4 cents. Now I will provide some highlights around our segment performance. Orthopedics had constant currency sales growth of 26% and an organic sales growth of 6.7%, including an organic growth of 8% in the U.S. This reflects a ramp up in elective procedures, especially in knees and trauma and extremities. our niche business grew 7.5% in the US, reflecting the strong bounce back as the COVID-related restrictions were lifted. Other orthopedics grew 26.5% in the US, primarily reflecting strong demand for our Mako robotic platform, partially offset by declines in bone cement. Internationally, orthopedics grew 4% organically, which reflects sequential improvement as the COVID-19 impacts have started to ease in Europe, strong momentum in MAKO internationally, and strong performances in Australia. For the quarter, our trauma and extremities business, which includes Wright Medical, delivered 7% growth on a comparable basis. In the U.S., comparable growth was 12.5%, which included double-digit growth in our upper extremities and trauma businesses. In the quarter, MedSurge had constant currency and organic sales growth of 8.3%, which included 6.4% growth in the U.S. Instruments had a U.S. organic sales growth of 0.9%, primarily related to growth in smoke evacuation, lighted instruments, and skin closure products, partially offset by slower growth in power tools. As a reminder, during the second quarter of 2019, instruments had a very strong growth of approximately 19%. Endoscopy had U.S. organic sales growth of 6%, reflecting strong performances in our sports medicine, general surgery, and video products. The medical division had U.S. organic growth of 13.4%, reflecting continued double-digit performance in our emergency care business. Internationally, MedSurg had organic sales growth of 15.9%, reflecting strong growth in the endoscopy instruments and medical businesses across Europe, Canada, and Australia. Neurotechnology and spine had organic growth of 15.5%. This growth reflects double-digit performances in all four of our neurotech businesses, CMF, neurovascular, neurosurgical, and ENT. It also reflects very strong growth in our neurovascular business of approximately 30%. Our U.S. neurotech business posted an organic growth of 17.3%. highlighted by strong product growth in Sonopet IQ, bipolar forceps, max face, cryotherapy, and nasal implants. Additionally, our U.S. neurovascular business had significant growth in all categories of our products, including hemorrhagic, flow diversion, and ischemic. Internationally, neurotechnology and spine had organic growth of 28.8%. This performance was driven by strong demand in China and other emerging markets, as well as Europe and Australia. Now I will focus on operating highlights in the second quarter. Our adjusted gross margin of 66% was favorable approximately 15 basis points from second quarter 2019. Compared to the second quarter in 2019, gross margin was primarily impacted by business mix and acquisition, primarily offset by price. Adjusted R&D spending was 6.6% of sales, reflecting our continued focus on innovation. Our adjusted SG&A was 33.4% of sales, which was slightly better than the second quarter of 2019. This reflects our continued cost discipline and fixed cost leverage, offset by the impact of the right medical acquisition. In summary, for the quarter, our adjusted operating margin was 25.9% of sales, which is five basis points improvement over the second quarter of 2019. This performance primarily resulted from our positive sales momentum combined with the disciplined ramp-up in cost, offset by the dilutive impact of acquisitions. Based on our positive momentum, we continue to reiterate our op margin guidance for the year of 30 to 50 basis points improvement over 2019, excluding the impact of Wright Medical. Related to other income and expense, as compared to the second quarter in 2019, we saw a decline in investment income earned on deposits and an increase in interest expense resulting from the additional debt outstanding for the funding of the Wright Medical acquisition. Our second quarter had an adjusted effective tax rate of 17% and was impacted by our mix of U.S., non-U.S. income and some adverse discrete tax items included in our provision to return adjustments. Our year-to-date effective tax rate is 15.2%. For the full year, we expect an adjusted effective tax rate of 15 to 15.5%, with some variability in the remaining quarters. including a slightly lower rate in the third quarter and a more normalized rate in the fourth quarter. Focusing on the balance sheet, we ended the first quarter with $2.3 billion of cash and marketable securities and total debt of $12.7 billion. During the quarter, we fully repaid the $400 million of term loan debt related to the borrowings incurred for the acquisition of Wright Medical. Year-to-date, we have paid down $1.15 billion of debt. Turning to cash flow, our year-to-date cash from operations was approximately $1.3 billion. This performance reflects the results of earnings and continued focus on working capital management. And now we'll provide a summary of our revised guidance. Based on our performance in sales RAM in the second quarter, as well as our capital orders pipeline, we expect 2021 organic net sales growth to be in the range of 9% to 10%. As it relates to sales expectations for Wright Medical, we now expect comparable growth for trauma and extremities to be at least 6% for the full year when compared to the combined results for 2019. If foreign currency exchange rates hold near current levels, we expect net sales in the full year will be positively impacted by approximately 1%. Consistent with the upper range of our previous guidance, net earnings for diluted share will be positively impacted by foreign exchange by approximately 10 cents in the full year, and this is included in our revised guidance range. Based on our performance in the first six months and including consideration of our improved full-year right medical performance impact, controlled spend ramp to facilitate growth, and continued positive recovery outlook, we now expect adjusted net earnings for diluted share to be in the range of $9.25 to $9.40. And now we'll open up the call up for Q&A.
spk07: Thank you. We will now begin the question and answer session. If you have a question, please press star 1 on your telephone keypad. If you wish to remove from the queue, please press the pound or hash 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 of Bank of America. Your line is open.
spk14: Well, thanks, and good afternoon, and congrats on such strong performance across the entire business. You beat on essentially every metric. So I just have two questions, and I'll state them up front in the interest of time. The first question, Kevin, is for you. I'm just wondering how you'd kind of frame your thoughts and the outlook for your hip and knee business in the back half and you know, given the rise in COVID cases that we're seeing. That's question number one. And then I'd love you to comment also as question number two on the acceleration in the neurovascular. Maybe just give a little more color. I mean, was that market share, you think? Was that, you know, was there strength in ischemic and hemorrhagic? Just kind of looking for a little more color on the acceleration there. Thank you.
spk05: Sure. Thank you, Bob. First, on the hip and knee, what we're seeing is really a gradual increase. We've seen it throughout the year. of return of elective procedures. These are deferrable procedures that need to be done at some point. And yes, with the Delta variant, you're starting to see pockets of disruption, but overall, the hospitals are very capable of being able to deal with this. And we're seeing in markets like Latin America and other markets, the situation's actually improving. So overall, we know there's going to be some disruption that is baked into our guidance, but we believe with the momentum that we have across not only our implant business, but as well as our capital businesses, And we feel pretty confident enough to raise the bottom end of our full year sales guidance. As it relates to neurovascular, if you look at that business, we had an outstanding first quarter. It was around 27%. So this is 30%. So it's not really a huge acceleration. I would say we really have a great product cycle going on right now across flow diverting stents, ischemic stroke, our hemorrhagic coils, our aspiration catheters. So we really have the bases covered, and we're having fantastic growth really globally, including terrific performances in Asia Pacific. So I do expect that we'll continue to have very strong performance throughout the rest of this year.
spk14: Great. Thank you.
spk07: Your next question comes from the line of Robbie Marcus of JP Morgan. Your line is open.
spk13: And I'll also add my congrats on a really impressive quarter here. Maybe two questions for me. One, to start off, we saw nice performance down the med-surg business and throughout medical. You know, there's a lot of new product launches going on here, so I'd just love to get a sense of what the key drivers are, how the procuity bed launch is going, and what you're seeing in terms of the capital equipment health of the market out there.
spk06: Hey, Rob, it's Preston. Just in terms of capital overall, I mean, we continue to see a pretty stable capital environment. I think we've seen that really through the first couple of quarters and really evidenced by the continued strong sales in medical, as you said, and also, of course, with our VACO technology. As it pertains specifically to medical, so obviously we have the precuity bed, which I'll talk about in just a second, but we also have really strong performances out of our emergency care business. We've seen that in the last couple of quarters as well. And so that continues to be very strong. And there's just been an uptick there really in the U.S. and outside the U.S. With regards to Procurity itself, the team is very pleased with how that launch has gone and started. We've really gotten a lot of awareness out there. We certainly have a lot of engagement from our customers, and we're starting to see a building momentum in orders and sales in the U.S. and starting to kick off that launch outside the U.S. as well. So we really expect that Procurity is going to continue to be a driver for medical really for the remainder of this year and as we go into next.
spk13: Great. And maybe for Glenn or Kevin, whoever wants to take it, I know you guys don't guide quarterly, but one of the concerns we've heard from investors over the quarter is that we're still in an environment without normal seasonality and concerns around maybe excessive weakness in third quarter from people coming out of lockdowns, vacations with doctors, et cetera. So I was wondering how you're thinking about the progression from second to third and third to fourth quarter, and if we're already back to normal seasonality or when we might be able to expect that. Thanks.
spk05: Yeah, thanks for the question. Robbie, as you know, Q3 tends to be seasonally our softest quarter, but I would assume that this year's seasonality will be very similar to what you've seen in prior years. And the talk about vacation, I've heard some of those comments. I really think that's noise. and that really that could delay maybe a procedure from one month to another month, but likely within the same quarter. So I expect normal seasonality, as you've seen in prior years.
spk13: Great. Appreciate it, Kevin. Thank you.
spk10: Your next question comes from the line of Chris Pascale of Guggenheim. Your line is open.
spk18: Thanks for taking the questions. The update on the right was encouraging. It certainly sounds like the upper extremities piece continues to do very well. Can you talk a little bit about what you're seeing in lower extremities? That was probably the more challenging piece to integrate. Curious how that business did versus 2019.
spk05: Yeah, thank you, Robbie. So first of all, sorry, Chris. Thank you, Chris. First of all, I would say that the total ankle business did very well in the second quarter. As you know, the rest of foot and ankle is much more discretionary. The podiatric volumes are coming back. So it was certainly a better quarter in Q2 than Q1. But it is lagging a little bit, just like we're seeing with spine and with hips and knees. It is a bit more elective, those foot and ankle procedures. But I'm very pleased with the stability of our sales force, the leadership that we put in place. And as elective procedures comes back, we do expect that will continue to grow. It was a marked improvement. We're not seeing the kind of disruption we saw early on with K2M through that integration. So very bullish on Wright overall. And as I mentioned in my opening remarks, delighted to have this company within our portfolio. I think I have a deeper appreciation. We knew it was a good company when we acquired it. And frankly, I think it's even better than we thought.
spk18: That's helpful. And then the color on Mako continues to sound very bullish, but the other ortho business probably didn't improve sequentially as much as the other pieces of the business. Can you help us sort of size the bone cement headwind there and maybe give us a sense for what the Mako Capital contribution looked like?
spk06: Yeah. So, I mean, as you mentioned, Mako continues to be very strong. And so that was one of the businesses for sure over the last 12 months, really, we've seen continued strength. So that's why you won't see necessarily that same sequential improvement that we're seeing on some of the other businesses. With regards to bone cement, of course, that's an area that has been declining, was certainly impacted by the pandemic, and so will be a detractor as we think about that overall category. We don't really provide a breakout of those, but just thinking about it in terms of MACO continuing to grow and offset by some declines from a bone cement standpoint.
spk16: Thanks.
spk10: Your next question comes from the line of Anthony Patron of Jefferies. Your line is open.
spk12: Thanks. I'll also add another great congratulations on another great quarter. The first one for me would be on deferred backlog procedures. Some of your competitors as recently even as this quarter are sort of putting numbers against that and sort of wondering if there's a number internally at Shriker that you could share on specific to the hip and knee business, what amount of deferred backlog is still out there, and how long do you think that will be a driver for the business? And the second one I'll put up there as well on right, you mentioned, Kevin, second half cross-energy selling potential into the second half, and we'll assume that extends into next year. Just sort of trying to quantify that. Is that a couple hundred basis points, and is that net of dis-energies? Thanks again.
spk06: Yeah, so first with regards to your question on the deferred backlog, you know, we don't have a specific number. I mean, there's a lot of variables that are going into trying to figure out what that is. What we do know is certainly over the last year that we haven't had the same level of procedures that we would have expected to as a result of the pandemic. And so super hard to predict exactly which percentages of patients that are back are from that deferred backlog or that are new patients. What we do know is that surgeons are continuing to try to work through as many patients as possible, finding different opportunities to add capacity into the scheduling or into their opportunity to perform those procedures. And so we don't expect that we're going to see any sort of outsized growth figures that happen in any one particular quarter or month. but that's something that we expect that we're going to be working through this backlog over the next several quarters. So we expect it to be a tailwind for us really over the next several quarters and into 2022 for sure. I was thinking about your other question with regards to Wright Medical. The cross-selling component is something that, as I mentioned, we're pleased with the start of that. It's early in the process. We're expecting that, as you mentioned, to continue for the rest of this year and into next year. We haven't provided a specific timeline size of that opportunity, but it's baked within the overall guidance that we've provided for the overall combined trauma and extremities business, which, as I mentioned, we expect to grow at least 6% compared to 2019. That also does include the disenergy component as well. Okay, thanks.
spk10: Your next question comes from the line of Vijay Kumar of Evercore ISI. Your line is open.
spk16: Thanks for taking my question. From my side, Kevin, maybe on that, Mako, is there a pieces to be made around utilization on robotic systems as having changed? Has that environment around utilization and how these systems are being used post-pandemic, has that changed at all? And have you seen an increase in that utilization?
spk05: Thanks, Vijay. No, we have not seen really any change in utilization post-pandemic. The gating factor really is being able to do the procedures and having the flow of the patients related to just the overall hospital operations. But so far, we haven't seen any change. We are seeing a lot more demand for MAKO in the ambulatory surgery centers. As you know, a lot of volume is starting to shift towards surgery centers. And for us, it's been a real tailwind. Our ASC offense is performing extremely well. And so there are a larger percentage of our MAKOs that are going into surgery centers, but that's been the only dynamic we've seen change. No real change to the procedure utilization.
spk16: That's helpful, Kevin. And maybe one for Glenn. Glenn, on gross margins here, I know you have price here in 2Q, but even adjusted for mix here, I mean, it looks like your gross margins have held up much better, you know, versus your peers who've been calling out shipping costs, manufacturing variances. And it's also kind of reflected in this guidance here, margins for back half, where the annual operating margins are about 2019 levels, which doesn't seem to be the case with your peers. Is there ever anything that's different about Striker? Have you guys managed your P&L better? I'm curious in what's driving the better margin performance versus your peers.
spk03: Yeah, I can't necessarily speak to our peers per se, but I will say, you know, your question is maybe music to the ears of our GQO group, and they have put a lot of focus in driving improved margins and also driving really good fixed cost leverage. And we will start to see that show up in our gross margins. You know, we're still not guiding on gross margins, so I will say – We'll see that benefit, but we will also see the benefit of mix come through, which right now, you know, right medical is a little bit of that influence that we're seeing on the margins. Offsetting those, though, will be price, which typically is going to be the biggest thing. We'll still see that in the minus 1% range for the full year, and we fully expect that that pricing impact will – be roughly offset by a lot of that positivity that we are seeing and also the mixed factor related to Wright Medical.
spk05: Yeah, I'd just like to add one comment. I'd just like to add one comment. So as you probably are hearing across not just the medtech industry but broadly, there is pressure on raw material input costs, and I'm delighted with the way that our organization has been able to offset those with a lot of other savings initiatives, efficiency initiatives, and purchasing initiatives, which has been kind of in the works for the last couple of years. But we've really built tremendous capabilities now, something I haven't been able to speak about, frankly, in prior years. But we really have the organization humming right now. And so we are able to offset some of the challenges that others are experiencing. And we're also experiencing with electronics and some certain components and feel really, really good about our supply chain resiliency.
spk16: That's clearly shown up in the numbers here, Kevin, versus your peers. Thanks, guys. Congrats.
spk05: Thank you.
spk10: Your next question comes from the line of Matt Mixick of Credit Suisse. Your line is open.
spk19: Great. Thanks so much. So one follow-up on robots, and I just had one question on just the sort of trends and mix that you're seeing in U.S.
spk03: news in particular. On NACO, obviously, congrats on all the great results and momentum, you know, up sequentially off a very strong Q1. But I was wondering if you could talk a little bit maybe about the color on any change in NICs of placements versus sales, or in particular, if you're starting to see any sort of cross-effects between upper extremities and the robot as these two business lines kind of move towards convergence in that new application, whenever that comes, 12, 24 months from now. And I have one quick follow-up.
spk06: Hey, Matt, it's Preston. Just in terms of robots and mix, I mean, one of the things that we identified approximately a year ago was that we were starting to see a bit of a trend towards financing. We haven't seen any significant changes in that approach or in that mix for the last year. So no big changes from a mix standpoint as we think about MAKO and how we're selling MAKO in the market. With regards to convergence, you know, again, we're still not seeing anything there. We've talked a lot about our excitement of a potential with Mako and Shoulder, but nothing new to report in that area at this point.
spk03: Okay. And then just on the knee business, one of the things one of your competitors talked about was sort of a heavier mix, you know, in primaries versus – versus revisions, I guess, given that revisions were a bit more of an acute emergent, they are more emergent procedures, so more of those during the pandemic maybe than primaries in some areas. I'm wondering if you're seeing something like that or any demographic mix shift just because of what we've been through and the types of patients maybe that were getting needs six to nine months ago versus those that are coming through now. Any color would be great.
spk06: Yeah, nothing specific to report in that area. I mean, the one thing that we have seen throughout the pandemic is variability. And so certainly by geography, by area, you're getting a lot of variability. So again, nothing that I would specifically point you to in terms of our mix.
spk14: Great. Thanks so much.
spk10: Your next question comes from the line of Joe and Wednesday of Siri. The line is open.
spk08: Good afternoon and thank you for taking the question. I have two really. We've talked for years about the movement towards the ASE. Are you seeing that accelerate or the same or is there any color that you can put around that?
spk06: Yeah, Joey, I mean, we've talked about this before. We certainly, the pandemic did create an acceleration of a trend that was already starting with regard to the shift to the AFC, and we would expect that to continue. We feel very strong about our offense and very good about our offense that we have with regard to the AFC and really being able to bring and leverage the full power of our product portfolio in that setting. So we're very comfortable with that shift and certainly believe that we have the products to satisfy that shift and really be able to take advantage of that trend.
spk08: But when you say you have the products for that shift, it's not just a robot, but I would assume that you're building out the whole ASC suite. Is that the right way to think about it?
spk05: Yeah, Joanne. The right way to think about it is we have virtually everything they need for an orthopedic surgery center, from building out the suites with the booms and the lights and the room design to the operating table to the beds and stretchers that are required to the power tools and the flight helmets that they wear, all the implants from foot and ankle procedures all the way to shoulder, including hips and knees, sports medicine procedures. Just think about our portfolio. It absolutely covers the gamut of what they need in those surgery centers. So that really makes life easy for an operator or an ASC to be able to contract with one company to cover such a huge portion of the procedures that are being done. So our portfolio really lines up beautifully for that. We also, you may have read recently, that we have this deal with Conformis that we worked on a couple years ago. We have started and launched our first few cases of a very, very simplified, streamlined offering that provides less sterilization. We call it kind of a knee in a box. The official name of it is Triathlon AS1 with personalized cutting guides for the procedure. And so that was designed specifically for the ASC, and that's now launched. But frankly, a few years ago, we didn't realize that NACO would be this popular in the surgery center as it's proving to be. So we now have both that we can offer because some surgery centers won't have a robot, but But yeah, it involves a huge portion of our portfolio across some of our med-surg products as well as our implant businesses.
spk08: That's helpful. Thank you. And my second question has to do with M&A. In October, you're rounding the two-year mark on the announcement of Wright Medical. Does that change your thinking and timing or tempo? Thanks.
spk03: Yeah, Joanne, you're right. It is rounding the two-year mark on Wright Medical. However, we're only nine months into sort of the cash flow impact of buying Wright Medical. And so, you know, as we announced at the time of the acquisition, we were going to focus on debt reduction and sort of tuck in kind of M&A. And so that really is what we've been doing. And you've seen it over the last nine months. We've paid down just, you know, a little over $1 billion of debt this year. We'll continue to look for, you know, opportunities to do that as we move forward. But we're ahead of the schedule that we thought we'd be on for debt pay down, so that's good. And then, honestly, our BD teams are working and looking at, you know, smaller tuck-in M&A deals, which we think actually provide the most sort of shorter-term growth upside. And so we're excited as they bring us new deals to look at sort of in that kind of size and category.
spk08: Thank you.
spk10: Your next question comes from the line of Larry B. Gilson of Wells Fargo. Your line is open.
spk19: Good afternoon. Thanks for taking the question. Two robotic questions for me. First on MAKO, I'd love to hear about the OUS rollout, you know, new geographies, how that's going, places like Japan. I think you're waiting for China. Hopefully I don't have those two backwards. And just color on the mix, you know, U.S., OUS of MAKO placements. And I had one follow-up.
spk05: Thanks, Larry. Our OUS business has picked up. As you saw in the pandemic, the U.S. business continued very strong on MAKO, but our OUS business did slow down. That's ramping back up again. We are fully operational with both Japan and China on all three applications, same with Brazil as well as Russia. And so Japan is really starting to accelerate, which we're quite excited about. China has started. It's a little bit behind Japan. Brazil, we now have our first few sales in Brazil, so that's probably one of the later ones, and Russia as well. So we're in the early stages in those four markets. The demand is very high from surgeons, which is exciting. Brazil was delayed a little bit by COVID, but we are starting to build momentum there as well. So it's very exciting. The surgeons, it's kind of taking us back to when we launched NACO Total Knee here in the United States. There's high demand for it. And you should expect strong performances in the quarters ahead.
spk19: That's helpful. And for my related robotic question, Kevin, you guys have started talking more publicly about, you know, evaluating, you know, having people at Stryker evaluating surgical robotics. So my question is, you know, how important is it for Striker to participate in this market at some point, and how do you want investors to think about, you know, the kind of investment that it might take to be competitive in that market? Thanks for taking the question.
spk05: Okay, thanks. I assume by that question you're talking about general surgery robotics. Yes. Sorry about that. Yeah, no problem. Just wanted to make sure that was clear. I would say there's really no need for us to be in general surgery robotics. As you can see, we're running a very good business at Stryker. It is a big market that has big growth potential, but it's something that, like other adjacencies that are attracted to us, be it areas I've spoken about in the past, like neuromodulation or peripheral vascular, this is an attractive adjacency. The pathway forward is not obvious and not clear at this time. but something we'll continue to look at, but it's not something we have to be in. But if the right opportunity presents itself and we think we can build a strong business, you know, we'll certainly make a move, but not obvious at this point. Thank you.
spk10: Your next question comes from the line of Peter Schickering of Deutsche Bank. Your line is open.
spk04: Good afternoon, guys. Thanks for taking my questions. The first one is, Like, look at the guidance that you provided. Can you give us color on where gross margins and SG&A should be exiting the year as you compare it versus the fourth quarter of 2019?
spk03: Sure. I won't speak specifically to guidance on gross margin or necessarily SG&A. I guess what I can tell you is that, you know, as we look at gross margin, we probably would plan on more orthopedic business maybe impacting that gross margin. But that, you know, that will be dependent on, you know, continued ramp in those businesses. On SG&A, you know, we aren't fully ramped in terms of what I would call a normalized spend. And so as we look to continue sort of fueling the growth as we ramp back up, we'll probably see increases in SG&A over the course of this year.
spk04: Okay, great. And then... We've spoken to a lot of hospital systems during the quarter. They talked about a pretty significant move of orthopedics from inpatient to outpatient, but not necessarily into the ASC, the jobs that get a lot of investor attention. As procedures move into the outpatient department of hospitals, does it impact surgeon selections of products at all, or is it no impact from the move?
spk05: Yeah, no, we're not seeing any impact on implant choice if they're moving to the hospital outpatient. or even, frankly, to the surgery center. Thus far, we're seeing surgeons continue to operate with the same implants, regardless of which facility they're operating in. Great. Thanks so much.
spk10: Your next question comes from the line of Kaila Kum of Jewelry Security. Your line is open.
spk09: Great. Hi, thanks for taking our questions. Just for right medical, you know, you're saying, you know, you're confident that the combined business will grow at least 6% this year. Can you just speak to any more detail around sort of the recent drivers in this business? Are you guys seeing any benefit from dislocation associated with the recent Intecra spinoff? And then, I guess, is there any reason why that 6%, you know, couldn't be a 8 to 10% growth next year?
spk05: Yeah, thanks, Kayla. What I'd tell you is we're really excited about the upper extremities business. It was growing very, very fast before the acquisition. That's continuing to really sing, especially in the United States. And we've just launched a new product which will provide extra fuel to the fire. And then on the lower extremities side, we knew that the foot and ankle was going to be a tougher integration, but it's going well. They're a little bit more elective, those procedures, but the total ankle is doing extremely well. So overall, the product portfolio is performing well. Our sales forces are integrating well. The U.S. integration is ahead of schedule. OUS is going to take a little longer, and we knew that. These countries take a little longer with the distributor arrangements that we have in place before they fully hit their stride. But if you recall, when we started the year, we said low to mid-single digit growth on a combined basis, and we sort of moved it up to mid-single, and now we're kind of thinking it's really going to be 6-plus percent for this year. And you should assume if this continues and the elective procedures on the lower extremities ramps up that we should have a very good year next year. And also our core trauma business is actually having a very good year as well. So overall, feeling very good about it. We're not going to give guidance to next year, but I think you can tell by our tone that we're feeling very optimistic about the future of our trauma and extremities business.
spk09: Great. Thanks. Thanks, Kevin. And then I guess just on the spine market, can you just compare or contrast sort of what you've seen in terms of how the recovery has progressed in this category, maybe compared with some of the other areas of orthopedics? Thank you.
spk06: Yeah, Kayla, just as we think about spine in comparison to other ortho areas, we haven't seen a significant difference in that recovery. I think I mentioned before variability really being the key word. And so, again, there's just been different pockets of disruption and opportunity as well. And so nothing significant that I would say that we've seen in terms of the recovery for spine that's been different than what we've seen in our other elective areas.
spk08: Great, thanks.
spk07: Your next question comes from the line of Stephen Lichman of Oppenheimer and Company. Your line is open.
spk18: Thank you. Hi, guys. So let me first talk about your spine business and how you are feeling about the state of that business. What's your outlook for the underlying growth, and what are your latest thoughts and timing on robotics into spines?
spk06: Yeah, so in terms of underlying growth, I mean, we don't break out guidance in terms of as we think about spine, but we do expect that market and that business to continue to accelerate as the recovery happens in the back half of the year. With regards to robotics, I mean, we've talked about this before of our key areas of focus for robotics and applications that are next. Spine is one of those, and so we continue to move down that path with a couple of different options. looking at Mako, but also through our Mobius acquisition and the Cardan robot, some opportunities there. We don't have a timeline that we are sharing at this point, and so something that we'll continue to update you on as we make progress in that area.
spk18: Thanks, Preston. And then just secondly, with the work of sensor in the full here for I think about six months, any update thoughts on a smart implant coming from that acquisition?
spk06: Nothing new to report at this point. I mean, obviously, it's still fairly new in terms of the acquisition into the organization. We still do believe in smart implants and smart devices and that they will have a role to play in orthopedics. And so, similar as with robotics, as we get further down that pathway, it's something that we will certainly keep you updated on. Got it.
spk18: Thanks, Mr.
spk07: Your next question comes from the line of Mike Mattson of Needham. Your line is open.
spk06: Yeah, thanks for taking the questions. This is David on for Mike. The first one just on ASC, just given the different dynamic there, maybe there's more quote unquote windchill time.
spk19: Does that ASC market need a separate sales force and strategy, or do you think you can leverage the current sales network?
spk05: Yeah, we have a very custom-designed approach to selling to the ASCs. It's not something we're going to elaborate on on this call, but I would say it has required a different approach, and we're really excited about the way our offense is working in the market.
spk04: Okay, great.
spk06: And then I guess on Mako, I mean, J&J talked about the Velos launch in the U.S., so just expectations over the next, call it 12 to 18 months, And thanks for taking the questions.
spk05: Yeah, well, expectations for us, I would say we expect Mako to continue to do very, very well. As you've seen with other competitive entrants into the market, it only validates that robotics is here to stay in orthopedics. And so we like our chances. We know we have an outstanding solution that delivers great results, which is why hospitals are buying their second and third and fourth Makos. And so we welcome the comparison. It's early days for them. And we just like the fact that robotics is going to continue to grow within orthopedics. Great. Thank you.
spk07: Your next question comes from the line of Dravis Teed of Barclays. Your line is open.
spk03: Hi, everybody. Thanks for the question. I realize China is a small part of your business, but just curious what you're seeing on the ground there with the China tenders and the volume-based procurements there.
spk02: I think that was supposed to happen at some point here in the next few months. I didn't know if there was an update on that front.
spk06: Hey, Travis. Thanks for the question. In terms of the VVP in China, you know, it is something that's ongoing. We don't have any major updates at this point as we're waiting on feedback from on the process. I think one thing to note, and you mentioned this, certainly China is a smaller part of our business. And then as we focus on the products that are actually potentially under the tenders, there's an even smaller component of our business. So just something to keep in mind as we think about the overall impact that could be coming from VBP on our business. So we expect to hear back something later in the third quarter. And at that point in time, uh we'll take a look at it the one thing that we know is just based on the timing we don't expect it to have any significant impacts on our 2021 numbers and so we'll continue to monitor it'll be something that we will contemplate as we as we go into 2022. all right that's helpful thank you and just wanted to get an update on the sports medicine business specifically um i know you had been growing double digits just curious if there's any additional color you can you can add there both in u.s and ous
spk05: Yeah, so certainly OUS, it's a much smaller business. I would say within the U.S., the tailwind of the shift to the ASC and our ASC offenses, in addition to great cadence of new products, has really fueled very strong growth. And we had a 20% growth in the first quarter in the U.S. in our sports medicine business. Great. Thank you.
spk07: Your next question comes from the line of Matthew O'Brien of Piper Sanders. Your line is open.
spk16: Great. Thanks so much for taking the questions. Kevin, you mentioned that at least 6% growth in trauma and extremities. Is that the growth of the overall market? Because I know the E part of that is growing faster than the T part.
spk06: Is that the overall growth in that overall category combined? And then As you think about going forward, typically that nine to 18 month period is when you start to see the most dislocation from a product and a rep perspective. Is trauma and extremity different than what we see across traditional orthopedic acquisitions just because there's fewer places for some of these reps to go?
spk16: So maybe the dislocation that you see could be a little less than we typically see?
spk05: Yeah, I think the way things are playing out right now, the dislocation is less than spine, certainly. That's been our experience. It's been a pleasant surprise so far, especially on the foot and ankle side where we had anticipated a bit more dislocation. And frankly, we have terrific products and we provided really quick stability for our salespeople to know who their boss is, to know where their territory is. And so we moved with more speed this time, learned some lessons from prior integrations. I would tell you that we think we're growing at least at the market, if not above the market, because you have to remember that at least 6% is for the full year, including a pretty depressed first quarter, right? So the first quarter of this year was not kind of a normal year as it relates to the extremities business at all. So to have that over the full year, at least 6% on a combined basis, I think that's probably growing above the market. And we'll see as the year progresses, feeling very good about both our core trauma business and our extremities business. Got it.
spk16: Thanks for that. And then over to neurovascular, I know you don't want to call out this acceleration here in Q2 versus Q1, but you're doing much better than the overall market by our calculations anyway.
spk06: So Are there specific areas that are accelerating? I don't know if it's scheming specifically within that category and that you're really well positioned there. And then just is your ability to bundle just much better than elsewhere? And I guess the real question is, you know, can this business grow, you know, upper teens, low 20s for the next couple of years?
spk05: Well, it's been growing at that kind of rate for the last few years. And this year you are seeing an acceleration. of growth and what I would attribute it to is we already have fabulous coils. Stent retrievers were already very, very good. But we've strengthened our portfolio with the float averting stent, with the Surpass Evolve stent, and with the .074 Becta catheter, aspiration catheter. So that for us was a product gap. We didn't have an easy to deploy, you know, empty catheter approach for float averting stent. And we didn't have a large bore aspiration catheter. So we plug those, let's call them product gaps. And we've had fantastic expansion around the world. And really the Atlas stent in China as an adjunctive stent for hemorrhagic is performing exceptionally well. And this global business is really, really well run. We have an exceptional leadership team over there that have been executing very well. But I would say the acceleration, let's call it this year's acceleration versus prior years, is really driven by this product cycle. that really has us covering all of the bases with excellent products that are meeting the needs of our customers.
spk16: Understood. Thank you.
spk07: Your next question comes from the line of Richard Newiter of SVB Lyric. Your line is open.
spk02: Thanks for taking the question. Kevin, you mentioned several times just how impressed you are with Bright Medical now that you've kind of had it under your operating belt for a few quarters now. I'm just curious, other than just the integration going better than planned, is there anything specifically either in the pipeline or embedded in that comment that just really is surprising you to the upside or making you more excited about the future? You mentioned Blueprint a few times. Is something with Blueprint? I'm curious if there's something that you're foreshadowing there or if it's just a general execution comment. Thanks.
spk05: Yeah, so listen, we knew they had a good business, and we knew that their culture was similar to Stryker's, but there's been some pleasant surprises along the way. Their talent is really excellent, and a lot of times when we buy companies, we buy them for their products, but then we have to infuse a lot of our management. Their leader for upper extremities, their leader for lower extremities are leading our businesses. Our head of knees came from Wright Medical, and so we have an infusion of talent that for me has been a positive surprise. I mean, really outstanding leaders. Their sales leader for upper extremities is outstanding. And so that's been one positive. The second, I would say, is their key opinion leaders. They absolutely work with fabulous key opinion leaders on both upper and lower extremities. And I would say that they are better key opinion leaders than we had within Stryker. And so those are two really, to me, pleasant surprises. And just the pipelines, we thought they were good. They've turned out to be a little better than we thought. And that really applies across the board. So there are certain things that you know when you do a public deal, you don't get to do the same amount of due diligence as you do with a private acquisition. And so those instincts, we had instincts that things were going to be good. They're proving to be even better than we first thought.
spk02: That's helpful, Collin. Thanks. And maybe just second question, you know, conformance and the initiative that you have there, I appreciate the, you know, the ASC help that product can potentially offer the solution there and the benefits there. Just wondering where else the conformance solution could go and thinking kind of with an eye towards robotics and digital surgery as well. So we'd be thinking about about that being more meaningful going forward in other capacities outside of just ASC adoption? Thanks.
spk05: Yeah, our primary focus was on the ASC, but there are a lot of hospitals that are concerned about sterilization and sterilization being sort of a constraint. And they'd like less trays, they'd like less instrumentation, they'd like less space taken up in their stockroom. I wouldn't say it's limited to ASCs, but that really is out of the gates, let's say, for the first six to nine months. Our prime focus is going to be on the ASC because their constraints on sterilization are the most acute. But I would say that there probably will be interest beyond that. But let's see, that'll be more of a next year kind of commentary that I'd be able to give you.
spk02: Thank you.
spk07: Your next call comes from the line of Josh Jennings of Cowen. you may proceed.
spk00: I was hoping to just follow up on some of the commentary on the spine business. And can we just review your outlook on the value proposition of the current robots out in the market and maybe help us better understand the enabling technologies under Stryker's roof that don't get a lot of airtime and and how you believe Striker's spine franchise can be competitive in front of the Mako spine launch.
spk05: Yeah, thanks. Listen, we're big believers in enabling technologies. We obviously have that with Mako. We did the Mobius acquisition, and we're very excited about the imaging aspect of that. We do have a gap in spine robotics, and we do believe that the first 4A, the two competitive systems on the market today, are really good guidance systems for the placement of pedicle screws and But it's providing value to surgeons, and we definitely want to have something like that on the market, which was what Mobius was working on. And then beyond that, we think with Mako we could get into other procedures and other applications. But robotics is difficult, so it's going to take time for us to develop those applications, and we'll keep you posted. But we are big believers in enabling technology, and we're going to continue to invest in that space.
spk00: Thanks for that. Maybe one follow-up for you. And Glenn, just as you're moving towards the anniversary of the Wright acquisition, and hopefully we're all moving towards more normalcy, in 2022, you've had an LRP operating margin expansion kind of range of 30 to 50 basis points. And how should investors be thinking about these cost savings programs that have been played for the last couple of years? and the amount of B&O leverage that Stryker can experience in the future. Thanks for taking the questions.
spk03: Yeah, yeah, sure. I think, you know, first of all, as a baseline, if you think about the normal operating margin that was acquired through Wright Medical, it was significantly less than, say, Stryker's normal operating margin. So if you think what have we worked on during this integration period, it was really – pulling Right Medical up and trying to look for all the synergies that we had built into our model so that we could drive better operating margins at Right Medical. I think fast-forwarding into next year and looking at, you know, where that might look on a combined basis, I think we'll get back to our normalized, you know, op margin expansion of 30 to 50 basis points. But at this point, that's a little ways away, and we're not really necessarily guiding for 2022.
spk07: Your next call comes from the line of Kyle Rose of Canaccord. Your line is now open.
spk15: Great. Thank you very much for taking the questions. So a lot's been asked, but we do have the AOS coming up in a few months here. And I wonder if you could just touch on maybe what some of the focuses that investors will see at the conference. I mean, when I think about what's happened over the course of the last 12 months, you have acquired ortho sensor. You did touch on a little bit of the knee in a box, ASD, knee opportunity there. And obviously robotics is getting a lot of attention in the ASDs and the outpatient settings. Maybe just level set us on expectations into the conference.
spk05: Yeah, listen, we don't have a big reveal at this conference. As you say, we'll have the conformance product that we can talk about, Triathlon AS1. We have Mako, which is still going to be talked about quite a bit, especially with the new HIP application that's starting to gain some steam, but still takes time to get that socialized more broadly. In addition to that, we have recent approval of the in-space balloon for large rotator cuff repair within our sports medicine business, which is a very exciting product. And a product used by sports medicine surgeons as well as the surgeons that do shoulder arthroplasty that come from Wright Medical. So that's also an exciting product, as well as the Perform Humeral product that Glenn mentioned earlier on. with Wright Medical. So a number of new products, but it's really, frankly, an exciting time to get back with our customers at scale. Not having that conference last year was certainly a gap and really look forward to engaging with our customers once again. And so that's really what we're going to be showing. It's not something brand new that we're going to be unveiling, but really more of just continuing the momentum that we already have.
spk15: Great. And then the second question is, I think earlier you noted that when physicians do move procedures to the outpatient or the ASC, they're typically using their standard instrumentation sets or the same implant systems they use in the hospital. Have you seen any changes in pricing or types of contracting that you're seeing when your ASC team does go out to engage on driving initiatives there?
spk05: No. Thus far, we're not seeing really any change in implant pricing, but what we are seeing is because of the capital requirement, we are seeing deals that involve multiple businesses of Stryker. We're seeing much more of that than we see in the hospitals. So the deals that we do typically involve four or five different businesses of Stryker, whereas hospitals tend to buy product category by product category. But no real change on pricing.
spk07: Your next call comes from the line of Matt Taylor of UBS. Your line is open.
spk17: All right, great. This is Andrew Youngly for Matt. Thanks for taking our questions. Maybe just one question, just on smoke evaporation. You mentioned it for several quarters now. Would it be great if you can talk a little bit about the drivers for growth in recent quarters and the sustainability of growth going forward? especially on the other side of COVID. Thanks for taking our question.
spk06: Yeah, absolutely. So we're very pleased with Smoke Evacuation and what that business does for us in terms of our ability to grow. As we look at it, you know, we really look at ourselves as market leaders behind our broad portfolio, and it's one of those businesses that actually sits across a couple of different divisions, both within instruments and also within endo, our endo businesses. You know, in terms of what our expectations are, I mean, we're really going to continue to expand as that market continues to expand both in the U.S. and outside the U.S., really driven by legislation and really the desire around a safer operating room behind smoke-free operating rooms.
spk17: Thank you.
spk07: Your next call comes from the line of Jeff Johnson of BERT. You may proceed.
spk01: Thank you. Good afternoon, guys. I'll be quick. Just one, Kevin, I'd be interested. It's always tough as an early reporter for you guys to know market share shifts and things like that and the volatile numbers we're getting from everybody these next couple quarters will be even tougher. Just wondering kind of momentum-wise that you're seeing with surgeons in your core ortho business, you know, can you talk to hips, knees, trauma, spine, any of those four areas where you've seen maybe a change at all, good or bad, in momentum you think of pulling surgeons in on a competitive front? That would be helpful. Thank you.
spk05: Yeah, listen, it feels good to be sort of getting back to normal. It isn't totally normal. There are these pockets of disruption. But I would say that surgeons are starting to fill up their schedules. They're taking meetings with us. They're coming to trainings. And so we feel like we're sort of almost getting back to the kind of rhythm we had before. You can see it in our guidance. I mean, it's a pretty bullish guide to say we're going to do 9% to 10% organic plus strong performance out of Wright Medical, which was an integration that was pretty complex involving the trauma extremities as well as our joint replacement business because those businesses used to be under common sales management and we've pulled those out. And so to be able to do all that and have this kind of wind at our back is pretty exciting. And I would say customers are ready to engage. AEOS, I think, will be a pretty big conference based on what I'm hearing. It'll be fairly well attended, and I think those are great opportunities for us to be able to show the power of Stryker and what we can offer to our customers.
spk01: Anything in those four core areas of orthopedics, though, where you're seeing kind of a change in your competitive positioning where just over the last three to six months or so, you may be feeling a little bit better or worse about your positioning and bringing in competitive accounts?
spk05: I would say more of the same. You know, you look at that knee number, that's a pretty good knee number. And that has been the killer application with Mako. And Mako is very, very strong, as you saw, through the pandemic. And I think that will continue to be probably the one business that stands out. I mean, obviously, Upper Extremities is going to continue to be a very, very strong performer. But I would say that's the one that probably we're feeling continued bullishness, if you will. But there's not been really any other new dynamics just in the last quarter.
spk01: Yeah, makes sense. Thank you.
spk07: There are no further questions at this time. I will now turn the conference over to Mr. Kevin Lobo for any closing remarks.
spk05: Thank you all for joining our call. We look forward to sharing our Q3 results with you in October. Thank you.
spk07: Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.
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