Stryker Corporation

Q2 2023 Earnings Conference Call

8/3/2023

spk20: Welcome to the second quarter 2023 Stryker earnings call. My name is Todd and I'll 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. 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 in 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, Chair and Chief Executive Officer, you may proceed, sir.
spk06: Welcome to Stryker's second quarter earnings call. Joining me today are Glenn Bainline, Stryker's CFO, and Jason Beach, Vice President of Investor Relations. For today's call, I'll provide opening comments, followed by Jason, with the trends we saw during the quarter and some other updates. Glenn will then provide additional details regarding our quarterly results before opening the call to Q&A. In the second quarter, we delivered organic sales growth of 11.9% with double-digit growth in both med-surgeon neurotechnology and orthopedics and spine. This comprehensive performance demonstrates the diverse and attractive markets that we play in and our ability to drive growth through strong commercial execution. We are also pleased with the continued positive outcomes of our globalization efforts. Our international business demonstrated strong performance with double-digit growth, complementing our strong and fast-growing U.S. business. In addition, we continue to see traction with our pricing initiatives, again delivering positive pricing in the second quarter. During the quarter, we continue to realize improvements in component availability, although disruptions remain in parts of our business. Our teams have demonstrated good agility in addressing these situations, proactively mitigating much of their impact. We delivered quarterly adjusted EPS of $2.54 a share, reflecting 13% growth compared to the second quarter of 2022. This result was primarily driven from the strength of our sales, but also marks the beginning of our margin recovery. We expect margins to continue to expand throughout the remainder of the year. Finally, with half the year behind us and our solid momentum, we have increased our expected full year organic sales growth to a range of 9.5% to 10.5% and increased our expected earnings per share to $10.25 to $10.45 per share. I will now turn the call over to Jason.
spk08: Thanks, Kevin. My comments today will focus on providing an update on the current environment, as well as capital demand, including MAKO, acquisitions, and an update on product launches. Procedural volumes have largely recovered to pre-COVID levels in most countries. And while volumes are strong, patient backlog still remains, and we believe the elevated orthopedic procedural demand will continue well into 2024. While volumes have largely recovered, hospital staffing pressures and supply constraints continue in pockets around the globe. These challenges are resolving gradually, as we expected, and will continue to be a moderate tailwind as we move through the second half of 2023 and into 2024. Additionally, demand for our capital products remained healthy in the quarter, as evidenced from the double-digit organic growth of our medical, instruments, and neurocranial divisions. Also, demand for Mako remains robust with strong U.S. and international performances, which is helping drive our continued growth in hips and knees. Next, capital order backlog remains elevated well above normal levels. Also, during the quarter, we executed a small tuck-in deal and also closed on the serous endovascular acquisition. Furthermore, our product super cycle continues to drive positive momentum. In late Q2, we successfully completed a limited launch of our 1788 camera platform and are poised for full launch in Q3. We also received FDA clearance for cranial guidance, our newest application under our Q guidance platform. This empowers surgeons to quickly plan a safe surgical approach using multiple imaging modalities and then navigate instruments with specific surgical procedures. Finally, we remain on track for the launch of our LifePak 35 defibrillator outside of the U.S. in the fourth quarter of this year and in the U.S. in early 2024. These launches will continue to support growth over multiple years. With that, I'll now turn the call over to Glenn.
spk15: Thanks, Jason. 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. Our organic sales growth was 11.9% in the quarter. The second quarter's average selling days were in line with 2022. The impact from pricing in the quarter was favorable by 0.5%. We continue to see a positive trend from our pricing initiatives, particularly in our U.S. MedSurge and Neurotech businesses, all of which contributed positive pricing for the quarter. Foreign currency had a 0.7% unfavorable impact on sales. In the quarter, US organic sales growth was 12%. International organic sales growth was 11.4%, impacted by positive sales momentum across most of our international markets, particularly Australia, Canada, Europe, and most of our emerging markets. Our adjusted EPS of $2.54 in the quarter was up 12.9% from 2022, driven by higher sales and operating margin expansion. partially offset by a higher adjusted income tax rate and the impact of foreign currency exchange, which was unfavorable 3 cents. Now I will provide some highlights around our quarterly segment performance. In the quarter, MedSurge and Neurotechnology had both constant currency and organic sales growth of 12.9%, which included 13.5% of U.S. organic growth and 10.9% of international organic growth. Instruments had U.S. organic sales growth of 12.9%, led by strong double-digit growth in the surgical technology business. From a product perspective, sales growth was led by power tools, waste management, smoke evacuation, and surge account. Endoscopy had U.S. organic sales growth of 3.5% against its strong comparable. This included strong growth in its pro-care, sustainability, and sports medicine businesses. The endoscopy business completed its limited launch of the 1788 camera late in the second quarter. Consistent with prior camera launches and the related transition period between the legacy camera and the new camera, this also contributed to muted growth in Q2. Medical had U.S. organic sales growth of 27.2%, reflecting very strong performances in all three of its businesses, acute care, emergency care, and SAGE. and benefited from continued improvement in product supply during the quarter. Neurovascular had U.S. organic sales growth of 9%, reflecting a strong performance in our hemorrhagic business. Neurocranial had U.S. organic sales growth of 9.6%, which included double-digit growth in our bone mill, bipolar forceps, and max face product lines. Internationally, MedSurge and Neurotechnology had organic sales growth of 10.9%, reflecting double-digit growth in our medical and neurocranial businesses. Geographically, this included strong performances in Europe, Australia, and Canada. Neurovascular's growth continues to be negatively impacted by BBP in China. Orthopedics and spine had both constant currency and organic sales growth of 10.6%, which included organic growth of 10% in the U.S. and 12.1% internationally. Our U.S. knee business grew 10.6% organically, which reflects our market leading position in robotic assisted knee procedures. Our U.S. hip business grew 8.8% organically, reflecting strong primary hip growth fueled by our insignia hip stem and continued procedural growth. Our U.S. trauma and extremities business grew 14.3% organically, With strong performances across all businesses, led by very strong growth in upper extremities and foot and ankle. Our U.S. spine business grew 5.2% led by the performance of our enabling technology and interventional spine businesses, including the recently launched Q-Guidance navigation system. Our U.S. other ortho declined organically 1.6%, primarily driven by the impact of deal mix changes, specifically more rentals related to Mako installations in the quarter. Internationally, orthopedics and spine grew 12.1% organically, including strong performances in Australia, Canada, and most emerging markets. Now I will focus on operating highlights in the quarter. Our adjusted gross margin of 63.9% was favorable approximately 60 basis points from the second quarter of 2022 and 70 basis points sequentially compared to Q1 2023. This change was primarily driven by the slight easing of certain cost pressures, decreases in spot buy purchases, improved productivity and the benefit of price, partially offset by the impact of foreign currency exchange. Adjusted R&D spending was 6.4% of sales, which represents an 80 basis points decrease from the second quarter of 2022 due primarily to a higher comparable in 2022 related to the ramping of costs for product launches. Our adjusted SG&A was 33.1% of sales, which was 70 basis points higher than the second quarter of 2022 due to a disciplined ramp of spend and investment to support our growth. We expect our full-year SG&A as a percent of sales to be in line with 2019 levels as we continue to invest for growth. In summary, for the quarter, our adjusted operating margin was 24.3% of sales, which was approximately 60 basis points favorable to the second quarter of 2022. This performance is primarily driven by the aforementioned easing of certain cost pressures, primarily on gross margins. Adjusted other income and expense of 66 million for the quarter was slightly higher than 2022, driven by increased interest expense. The second quarter of 2023 had an adjusted effective tax rate of 15.2%, reflecting the impact of geographic mix and certain discrete tax items. For 2023, we reiterate our full year effective tax rate guidance to be in the range of 14 to 15%. Focusing on the balance sheet, we ended the second quarter with $1.5 billion of cash and marketable securities and total debt of $12.9 billion. Approximately $100 million of the term loan debt was paid down in the quarter, reflecting year-to-date payments of $200 million and a remaining balance of $650 million. Turning to cash flow, our year-to-date cash from operations is $1.1 billion. This performance reflects the results of net earnings and higher accounts receivable collections. Considering our year-to-date results, our strong backlog for capital equipment, and continued positive procedural trends, we now expect full-year 2023 organic sales growth to be in the range of 9.5% to 10.5%, with pricing to be slightly positive for the year. If foreign currency exchange rates hold near current levels, We anticipate sales will be unfavorably impacted by approximately 0.3%, and adjusted EPS will be unfavorably impacted from 5 to 10 cents per share for the full year, both of which are included in our guidance. Based on our performance in the first half of the year, together with our strong sales momentum, we now expect adjusted earnings per share to be in the range of 10.25 to 10.45 per share. And now I will open up the call for Q&A.
spk20: Thank you. At this time, if you wish to ask a question, please press the star and 1 on your touchtone phone. You may remove yourself any time by pressing star 2. Once again, that's star 1 to ask a question. Our first question comes from Robbie Marcus with JP Morgan. Please go ahead.
spk12: Oh, great. Thanks for taking the question. Congrats on a great quarter here. Two for me. First, Great quarter. It looks like you're raising more than the beat on both the top and bottom line. Looks like you're taking a good amount of share still in ortho across hips, knees, and extremities trauma. Just as we think about the balance of the year, you touched on some of them, but would love to get a sense of what gives you the confidence these elevated trends are going to continue and any visibility on the margin side that gets you comfortable moving it up more than the beat.
spk06: Hi, Robbie. It's Kevin. I'll start off with sort of the confidence in the procedures. You know, we've talked about this since the third quarter of last year, that we could sense, based on surgery backlogs, talking to physicians and seeing that there was pent-up demand through the pandemic. So we expected elevated procedures coming into the year. That has certainly played out. You've heard even similar comments from some of the providers in the space. And the surgery backlogs are long. They're longer. Probably a two-month surgery backlog is more like four months. And so that gives us confidence that through the end of this year and into next year, that we're going to continue to see elevated procedural growth. And we also see that in the demand for our small capital, which again, is equipment that's used for ongoing procedures. And then I'll turn to Glenn for margins.
spk15: Yeah, Robbie. As we got through the quarter, as I mentioned, we really started to see some positive and easing of some of the cost pressures that we had felt in Q1 and certainly last year. I think we also are starting to feel some of the improvements in supply chain. That's not to say that everything's rosy. We are still feeling inflationary pressures in transportation, some of our commodities, labor, certain electronics. But I will say that spot buys in Q1, spot buys in Q2 have not been material. And we're getting near the amortization of the impact of spot buys from last year. So I feel like that gives me good confidence that I think we'll see continued improvement in our gross margin as we move into Q3 and Q4. And so we really will feel that gradual improvement and we'll feel it all the way down to the up margin line.
spk12: Great. And maybe just a follow-up for me, for both of you, or however you want to take it. You know, people are really happy so far with the year, but unfortunately, we're always focused on the future and looking out to next year already. You know, you talked about, Kevin, these trends continuing. You have the super cycle in MedSurge. Just any kind of thoughts on how we should think about these elevated trends continuing and I know you're laser focused on getting back to your 2019 operating margin of 26.3%. How do we think about how far out that might be? Thanks a lot.
spk06: Well, I think Jason's comments in the opening says we do expect the procedural positive trends to continue well into next year. I don't have a crystal ball exactly whether that be 100 basis points or 200 basis points more elevated than it was, you know, through the pandemic in last year. So, but we expect that to be elevated. The super cycle of products is wildly exciting. Something like, you know, look at the Neptune S is off to a great start with an instrument. The 17-8 is only going to start kind of the latter part of this quarter. So that's going to be a big impact next year. Got a new defibrillator coming. That's more next year. So there's, there's, these are launches, procurities multiple year. We have the stair chair, the expedition chair, amazing product that, that medical launch brand new and it's a new category altogether that launched Q1 of this year that'll continue into next year. So a lot of continuation of really strong growth across our businesses.
spk18: So you should expect we're going to continue to be a high growth company going into next year. And as it relates to margins, sorry, go ahead.
spk06: Yeah. Let me just, sorry, let me finish. I forgot. It was a long question. Uh, so, uh, Yes, we are absolutely committed to returning to pre-COVID margins and then growing our margins thereafter. This quarter marked a really important step, a very big first step in that evolution.
spk18: Thank you. We'll take our next question from Larry Beagleson with Wells Fargo.
spk05: Good afternoon. Thanks for taking the question, and I'll echo Robbie's congratulations on a very impressive quarter here. So, Kevin, I wanted to start on MedSurge, the new products. Just talk about how the new camera and endoscopy might have impacted Q2 and what you expect the impact to be from that in 23 and 24, and medical growing 27% organically after Vocera anniversaryed.
spk06: know what drove that and how did vocera do in the second quarter and what's the outlook and i had one follow-up okay you got a few in there already and you got a follow-up but okay that's fine uh listen we're we're really excited about the performance um of our of our med surge business continues to be really a great segment and of our company what i tell you on the endo side is the camera had really no impact it was a limited launch really just making sure that the product is performing as we thought And the test cases have gone extremely well. And really, the full launch hasn't started. That'll start in the back half of the Q3. So you'll start to see some impact in Q3. That'll accelerate in Q4. And it'll even accelerate more next year. As you know, you've seen these launches in the past. So it really picks up year one. Sometimes even year two can be even higher than year one. So we're going to see a lot of impact next year. There'll be some impact in Q3, but in Q4. but really it'll start to ramp. So it's really no impact in Q3 on endoscopy. And that's why endoscopy is a little bit softer. Had a big calm from last year too, but at the end of these camera launches, you do see it start to slow down and then it really picks up with the new product. Medical had an absolutely stellar quarter, another 25 plus percent growth. And we had that in the fourth quarter, if you recall, as well. And medical is really... Over the past six years, it's become a large, consistent, high-growth division. It does move around a little bit from quarter to quarter, but overall, if you look at it rolling four quarters, rolling eight quarters, this is a real high-growth business now. I think it's probably one of the most misunderstood businesses, honestly, or I would say underestimated business in our portfolio. You've got the integration of Sage, Physiocontrol, Beaucera, which you referenced, but you've got new launches. PowerPro2 was a new ambulance caught at the beginning of last year. Procurity bed frame still gaining steam. Sage has Primo Fit. You have the exhibition stair chair that I mentioned. And then there's also a lot more awareness on safety. So our AED portfolio, there's a lot more awareness. So I would say new demand for AEDs based on all the safety, the Lucas automatic chest compression product, and really a fantastic management team in medical. So will I expect 25% again next quarter? Probably not. But I do expect that medical will continue to be a very high growth business for a long time to come. And then specifically related to Vocera, both sales and orders ramped in the quarter as we expected. So you remember, we sort of talked to you about Q3, Q4, and Q1 of this year kind of being flat after we sort of went through the integration and we said it's going to pick up meaningfully. Both picked up meaningfully in Q2, both sales. as well as orders. And so they were also a contributor, but really strength across the entire portfolio.
spk05: Thank you. And just to keep my follow-up really brief, Glenn, the comps are very different in Q3 and Q4. Should we be thinking about stronger growth in Q3 relative to Q4, just the cadence for the rest of the year? Thank you.
spk15: Yeah, I mean, a couple of things. you know, Q3 seasonally is usually not a super strong quarter, but I think, um, if you, if you focus on Q4 and you look at the comp that we're up against, uh, that probably plays into, you know, how much we're going to grow against that comp. Um, the big number last year was, you know, 5.2 billion in the quarter, which is a big number. So I think what you'll see is you'll see, um, you know, slightly higher growth in Q3, and then that'll come down a little bit just because of the comp.
spk18: But I think we'll end the year nicely, well within our guidance.
spk20: Thank you. We'll take our next question from Pito Chikering with Deutsche Bank.
spk07: Hey, good afternoon, and thanks for taking my questions. A very nice quarter. If all upon the medical, can you talk about the CapEx environment, how much has changed in the last 90 days or so, and if hospitals are increasing CapEx as revenues and costs are looking pretty good for hospitals? And on the backlog, did you guys reduce the backlog in the quarter, and was that a bolus for 2Q? And should that be normalizing back half a year? And then also on the microchips, should we view that getting better as a gross margin improvement? from lower costs or increasing revenues as you reduce that backlog?
spk08: Jason, I'll start here and then maybe some pile on. But as we think about the capital environment, we continue to see great strength from a capital environment standpoint. And even as you think about the backlog in our business, you know, I think your question was, was there a bolus? But if you look at our backlog, it continues to be at very high levels, higher than what we came into the year with.
spk18: So still strength there on the capital side. Okay.
spk07: And then one more on gross margins. It sounds like a lot of tailwinds and 2Q are pretty much permanent in nature. And you said that the gross margins improved in the back half of the year. Can you refresh us on how many months of inventory you guys have on the balance sheet? And when those, you know, these, you know, deflationary pressures were seeing, should they start transferring to the P&L? Just wondering if that's sort of the key driver of that gross margin improvement in the third and fourth quarter simply by duration, by waiting for that to transfer.
spk15: Yeah, I think that, you know, the big thing that really – sits in inventory and worked its way through sort of in the first quarter and the second quarter was the impact of those spot buys. And generally inventory turns, depending on the product, anywhere from six to nine months. So yeah, we will generally see the impact of spot buys reduced for the rest of this year. Keep in mind that we still have this sort of inflationary headwind that we will be working against in Q3 and Q4, but just the mere fact that I feel like we're getting to the end of the impact of spot buys gives me confidence that we should see gradual gross margin improvement in the rest of this year.
spk20: We'll take our next question from Vijay Kumar with Evercore ISI.
spk19: Hey, guys. Thanks for taking my question, Kevin. The guidance is pretty impressive, 10% organic. Are comps something that we should worry about from a fiscal 24 perspective? I know you mentioned certain product tailwinds. Just help us contextualize that 10% given that some of these procedure trends, it looks like it could sustain into 24.
spk06: Yeah, thanks, Vijay. Remember, we grew 9.7% organically last year, so we had a pretty good year last year as well. And we're growing on top of that. Again, this innovation cycle we have is tremendous. The procedure demands are strong. As you see, we're growing very fast. Even though the market's elevated, we're growing above market in virtually every one of our businesses. So that gives us confidence that we're going to continue to be able to grow at the high end of MedTech. And for this year, we already have the years already in the bag. Yes, the Q4 last year was abnormally fast, growing over 13%. So In our guidance, we do reflect a little bit of a slowdown in the growth rate just related to those comps. But we do expect, based on backlog of surgery, demand, aging population, more people playing pickleball, you name it, right? Activity causing injuries. So this will continue to be a tailwind. And we think through much of next year, that's our current visibility. I mean, obviously that could change, but that's how we see it. And we kind of called this, if you recall, Q3 of last year, we called that this is what we were going to see. It's actually materializing, frankly, a little better than we expected in terms of the flow through and procedures and hospital staffing. They're dealing with it much better than we expected. There are still flare-ups here and there, but it's certainly gotten better. Hospitals are better equipped and patients are anxious to get their procedures done.
spk19: That's helpful, Kevin. Glenn, maybe one for you. It looks like we're on track to well north of 50 basis points of margin expansion in fiscal 23. Is this something that's sustainable, you know, when you look at that operating model, assuming there's nothing crazy on the inflation side for next year? I'm curious how we should be thinking about leverage.
spk15: Yeah, you're going to force me to divulge all the things we want to tell you in our investor meeting. But I would say, you know, our old mantra of expanding 30 to 50 basis points every year was absolutely doable. And it's absolutely something that we are planning on getting back to. We're working through some of these higher costs through the P&L. There's this ongoing inflation that we will solve for. But I don't think that as we look forward over the longer term, that margin expansion is something that I think you'll continue to see out of us. I don't want to pinpoint a number just yet, but yeah, it's something we'll continue to have.
spk06: Yeah, one thing I would add, so Glenn wasn't necessarily referring to 24 when he said 30 to 50. We're on a ramp and on a major focus to get back to that 26-3 and then thereafter kind of get into a normal rhythm. So we'll give you more clarity around that at the analyst day in November.
spk20: We'll take our next question from Matthew O'Brien with Piper Sandler.
spk03: Afternoon. Thanks for taking the questions. And I really don't want to make too much out of one quarter here, but when I look at the two-year stacked growth rate for you guys versus your biggest competitor in hips and knees, you had been outperforming them massively the last several quarters. This quarter, it really tightened up the delta between you two, specifically in knees. So I'm just wondering if there's anything you're seeing competitively, maybe in cementless or on the robotics side, that you should call out or that we should think about as you go forward, just in terms of being able to significantly outperform the market in hips and knees over the next year or so?
spk06: Yeah, look, I'm actually pretty happy with double-digit growth in our knee business. Look at OUS. We're really starting to ramp the growth. OUS, Mako's just getting going. It's really getting started. So that massive outperformance you saw before was on the backs of Mako and Cementless. And we're probably going to see some of that outside the United States. And the U.S. performance is very strong. Like one quarter, I'm not going to get overly excited. We're still the fastest growing hip and knee company. And you remember from the past, you used to be, you grew well in one, you didn't grow well in the other. And we covered both hips and knees. It wasn't hips or knees, hips and knees in Q2. So no, we're not seeing anything that's really different. We've focused on our own execution with our market-leading robotics and our strong portfolio continue the rollout of Insignia, which has been an absolute home run.
spk18: We're going to continue to perform very well.
spk03: Appreciate that, Kevin. And then on the pricing side, I know it's now flipped from kind of a headwind this year to a tailwind, but I'm assuming we're working through some of those benefits. So Is pricing going to be another, you know, tailwind or positive for Stryker into 24 and even 25 as well as you've got these long-term contracts? Thanks.
spk15: Yeah, I think I'll make some couple comments around that without maybe providing exact guidance on 2024. But, you know, if we look at the initiative that we executed this year, we had a very targeted program that looked kind of product by product. And in general, what we're seeing is MSNT is generally gaining positive price. And I would say ortho is less negative and has much larger, longer-term contract negotiations. Keep in mind, too, that our price comparison that we report on includes sort of same product sales compared to prior year. So if you think about increases that we gain on prices, say, on next-gen products that we're going to launch, That's not necessarily included in the number we say for price. But I would tell you that we generally see meaningful price increases on these next-gen products, especially when we bring newer technology to the market or a feature set that currently isn't provided. So I do think that we'll continue to see price as a tailwind. It's a muscle that we've certainly grown this year, and I think it's going to be part of our game plan for sure.
spk20: Thank you. We'll take our next question from Ryan Zimmerman with BTIG.
spk02: Oh, hello. Thanks for taking the questions, and congrats on a really nice quarter, guys. I wanted to ask Kevin a little bit about the Cirrus deal and neurovascular. It was slower before, but 9% organic growth in the U.S. is really nice to see, especially in hemorrhagic. You know, when we look at what Cirrus has done in the U.K., it's been pretty impressive. And so, you know, I'm curious kind of what your expectations are for the contribution in the U.S. and when we start to really see that in numbers, especially if you're doing 9% U.S. organic growth in neurovascular.
spk06: Yeah, so the first thing I'd say is that Cirrus has not yet approved in the United States. So that 9% growth had no benefit from Cirrus, right? So I think you know that. I just want to make that clear to everybody that the trials are ongoing right now, and we look forward to that approval in the United States. We launched two new products. We had a a tetra small coil as well as a 46 catheter 46 size catheter vector catheter. So two new products that helps in terms of driving the hemorrhagic growth. And and you know, the US has been a little bit of a challenge for us more if you look back the last few quarters and really pleased to see that stuff up in this quarter and we're very excited that we closed the deal obviously it was it was during the quarter. It didn't have a big impact at all, but a lot of excitement. The product we know performs extremely well based on what's happening OUS, and we can't wait for the approval. It's definitely going to be a shot in the arm when it does happen in the United States.
spk02: Yeah, no question. We saw that at SNIS this week. I wanted to ask a follow-up on robotics. We didn't hear you say much on your shoulder and spine programs, and just given the that there is some other commentary out there from competitors about kind of shoulders and spine. You know, what's your latest thinking about potential timing, launch cycles and so forth on MAKO shoulder and or spine? Thanks for taking the question.
spk06: Yeah, great. Nothing new to report. We're kind of on schedule with what we had said before. Spine in the back half of next year and shoulder towards the end of next year. And frankly, we're not really concerned about competitive activity in this space. We already know Globus and Medtronic have robots in Spine. We are really excited about our overall enabling technology, starting with Q Guidance. We have an additional product that we'll be launching and Mako Spine. So by the end of next year, we'll have a really compelling suite of enabling technology tools for Spine, which we're really excited about. If someone else is first And shoulder doesn't concern me in the least. We have Blueprint already. We already have a very powerful enabling tech platform for shoulder, whether it's patient matched ID, whether it's using HoloLens to do the procedure with virtual reality, whether it's the Blueprint technology, which is amazing. And we're going to use that amazing Blueprint technology to feed Mako. And that'll just be icing on the cake on an upper extremity business that is cooking on gas right now with amazing growth.
spk18: quarter after quarter after quarter.
spk20: Thank you. We'll take our next question from Shagan Singh with RBC.
spk00: Thank you so much. I was just wondering if you could refresh us on your capital allocation priorities and M&A just in terms of deal size valuation and areas of interest. And then on the product side, if you could just touch on trauma and what's driving the strong growth there and the durability. Thank you.
spk06: yeah sure so as we've said in the past we our first focus on cap on capital allocation right now is paying down debt given the debt that we built up on right medical as well as vocera that does not stop us from doing little deals we did one small deal with an instrument and then we closed on cirrus so we're still looking at tuck-ins primarily this year but the deal teams are all very active they're having discussions they're out building their lists uh and and they're all really having nice pipelines and so as our cash position gets strong again we'll be back on offense that will be the first use of our cash i mean we've had a really terrific track record of m a and we can't wait to be able to get back on offense with m a but but first priority is certainly um certainly paying down debt at the moment And we're doing that. So what's the second part? Oh, trauma. Yeah. So trauma, I'll tell you, this right medical acquisition has been spectacular. The upper extremities business is growing very strong double-digit growth every quarter. Foot and ankle really starting to pick up. So we're really excited about the performance. This quarter was terrific in foot and ankle with strong double-digit growth. And then core trauma has actually been a big beneficiary of right medical. So in the past, our core trauma business would, was really diluted in its focus. It was focusing on foot and ankle, focusing more on extremities because they're faster growing. And we were sort of not paying as much attention to core trauma. We had a great leadership team on core trauma with now dedicated, focused R&D resources. And obviously, they launched Gamma 4. We had the T2 Alpha product launch. We're going to have PERIPRO products launch soon. Excited about some other innovations we plan to show at OTA. later in the fall. So really refreshing the portfolio, great focus on core trauma, and they had a really excellent quarter as well. So all three business units performed very well in the quarter. And again, the right medical deal, it's not just benefiting our extremities business, it's actually providing more focus on core trauma, which is fueling terrific growth in core trauma. So trauma, we expect to continue to be a very high growth business for a long time to come.
spk20: Thank you. We'll take our next question from Josh Jennings with TD Cowan.
spk14: Hi, this is Eric, all for Josh. Thanks for taking the question. I was curious to hear your thoughts around smart implants. One of your competitors is moving closer to a full launch of a smart implant technology and was just curious to hear your updated thoughts there. And if there are any updates to share from your work around ortho sensor, that would be great to hear as well.
spk06: Yeah, listen, I think smart implants is interesting. We obviously have motion sense, which is a wearable on the outside to measure basically similar dynamics that are going to be measured from the smart implant. So I think range of motion, all these factors, it's interesting. We're not quite sure yet what to do with that data, how compelling that will be. Will that affect patient selection? Will it affect approaches to procedure? So I would call it something that is more investigational and more of a learning that we're going to have. And, and, but I do think it's, it's something that could be important in the future. So not discounting it, don't have, you know, anything more to share on OpenSense rather than we are, we have launched MotionSense, which is the wearable, which attaches to both the femur as well as the tibia to track mobility and a range of other metrics. And we're going to learn a lot. We will, and so will others in the industry about what is it that really matters that you're measuring in the post-surgery period, and really how does that affect the patient care, maybe patient selection, maybe what implants they should be using. Is there a feedback loop that's meaningful? We don't know. We don't have answers. We have a lot of questions, and it's going to give us new data that we can then learn from. So that's how I'd characterize it at the moment.
spk18: Understood. Thank you.
spk20: Thank you. We'll take our next question from Matt Mixick with Barclays.
spk10: Hey, thanks for taking the questions. I wanted to ask a question on MAKO. One of the comments that you made, and I apologize if this came up already, I've been hopping back and forth here like a lot of folks tonight in different calls, but you mentioned an increase in deal mix, I guess an increase in rental deal mix affecting the dollar revenues that came in from MAKO this quarter, and You know, that's something we've heard from other folks as well, as you're, I'm sure, aware in terms of robots, more sort of hospitals taking a flexible option to leasing or pay-as-you-go arrangements for robots. And first, I'm wondering how tightly correlated that's with sort of growth in the ASC. And then second, in the past, Kevin, I think you talked about like early on, well, some hospitals are capital rich, some hospitals are operating in commercial, have endowments or whatever. There's different hospitals have a different preference on how they want to pay for it. That was sort of like how we used to think about this. I'm curious whether you're seeing some hybridization of that. In other words, if we want another NACO, we could pay for it, but let's scale into it with a lease arrangement or something. I'm wondering if you've seen that kind of shift in the market. I wouldn't follow up if I could.
spk06: Yeah, sure. Thanks. So what I would tell you is the ASCs growth is obviously increasing in the ASCs with Mako and virtually all of the ASC deals are financed because physician ownership is part of the ASC scenario. They don't have the capital budgets the hospitals do. So yes, as ASC penetration increases, more financing rental type deals are automatically going to happen. They're virtually all financed, the ASC. Your question around the hospital dynamic, I think it's just if you have competitive systems that are not sort of being charged for, then the hospital says, well, maybe I don't need to spend the capital, even if I have the capital, and maybe let me talk to you about what you do. And so we offer them the full suite. And yes, some are opting to go for the financing route that maybe in the past would have purchased. But we have a healthy order book. And we're not really agnostic to whether they want to buy cash or whether they want to finance it. It really doesn't matter to us because, you know, we get the value from that. Whether we get the value on, you know, cash on day one or get the cash over time doesn't really concern us. And it certainly has been fuel for our strong implant growth.
spk10: That's great. And just quickly on, you mentioned it earlier in the camera and not really having an effect yet. But, you know, quite differentiated and quite different this, this cycle, you know, with the sort of opportunity to, you know, test surgical margins around tumors and things that, that really represent kind of new, a new, you know, a new phase of, of sort of camera, uh, and, and imaging functionality. Any sense, I know it's early, but, uh, of what that does to the shape of this product cycle? versus what we've experienced in the past. I mean, fluorescence imaging was pretty big for you in the last launch. This sort of takes that up a notch. Any color you can provide in terms of what your expectations are, the early interest, et cetera, on the camera side. Thanks.
spk06: Yeah, thanks. Look, it's a little early still for me to get too ahead of myself, but the fluorescence imaging was a big deal, right? First in 1588 and then in 1688 when you had the overlay on fluorescence where you didn't have to toggle between black and white and fluorescence. That was pretty meaningful. So those are pretty big steps, but you're right. With the tumor margin ability, the ability to use new dyes beyond ICG, wildly exciting to get into lung, to get into bladder. This is really, really exciting with new pharmacological agents. It's also a camera that is extremely good in neuro and sports where historically we weren't as strong. It was fabulous for general surgery, but Not quite as good. This camera addresses those issues. So I'm really excited about it. But, you know, it's a little early. The test cases have gone very well. I wouldn't expect this to be any less performing than our prior launches. Potentially could be even more. The feedback so far is pretty exciting. And, yeah, we have some really good features in this one.
spk20: Thank you. We'll take our next question from Joanne Winch with Citibank.
spk16: Thank you very much. I apologize. There's a lot going on tonight. But your operating margins were really impressive. And I'm curious how we should think about those for the back half of the year and if you can give a full year guide on it. Or even how we should think about this into next year if you're willing to wade that far. Thank you.
spk15: Yeah, Joanne. Yeah, we really, if you think about operating margins, especially our performance in Q2, we saw really sort of good improvement, honestly, in gross margin, just in terms of some easing of some of the cost pressures. As I've mentioned before, spot buys are not material. They weren't material in Q1, and they're not material in Q2. I think the other thing, too, that we're feeling is just that now that we have more evening of supply, we're also back to sort of better productivity gains. And so all of those things give us good confidence that we should see gross margins improve in the back half of this year. And they'll gradually improve because we're still feeling some of this inflation. But that kind of gives us the confidence. And obviously, some of that will roll into next year as you think about our performance for next year. At this point, we're not going to guide on that other than to say that we do think we'll see some gradual improvement for the rest of this year.
spk16: Maybe this is an analyst question at the meeting or the next time you gather us all together for an update. But how do you think about, you know, in a more normalized post-pandemic environment, sort of operating margin expansion on a regular go-forward, maybe even year-over-year basis? And thank you for taking the questions.
spk06: Yeah, Joanne, earlier in the call, I think this question was asked. I'll just repeat that we are laser focused on, I would say, trying to sprint back to the 26-3 that we had in 2019. And so we're going to try to move margins in a more ambitious way to get back to that. And then once we get back to that kind of level, I think you're going to see us wanting to expand margins in a kind of a more consistent way. I don't know the exact number. something like 50 bps. We'll get more specific as time passes, but it would be more like an annual, more moderate, nice progression year after year after year, especially with this kind of high growth that we're experiencing organically. You're going to expect to see more normalized margin expansion, but in the meantime, we're looking to move at a faster clip given the fall-off that we've had since 2019 and try to restore those margins.
spk20: Thank you. We'll take our next question from Rick Wise with Stiefel.
spk17: Good afternoon, Kevin. Hi, everybody. Kevin, I was hoping you would just give us a little more color and perspective on really your very solid international performance. Double digits, obviously, almost as strong as the U.S. performance, but a little slower than the first quarters at pace. You highlighted the strong emerging markets. So I'm just going to ask one question with a couple of parts. How sustainable is this? You talked about some of your key initiatives and maybe just your perspectives on the sustainability, what's the drivers here, and maybe where we are in terms of procedure volume recovery back to normal in Europe, just in a larger picture sense. Thanks so much, and great to see the excellent quarter.
spk06: Yeah, thank you. Look, it took us a while, but the last five years, international growth has exceeded the U.S. growth. Now, obviously, the U.S. growth this quarter was pretty spectacular, but we're absolutely a believer in continuing to have very good international growth in the years ahead, frankly, making up for lost time because our market shares are still below what we have in the U.S. in most of the international markets. And so we have a significant upside in front of us. Procedure volumes are pretty much back to normal everywhere. They're back to normal in Europe. They're back to normal in Australia. They're back to normal pretty much in Japan. So the market that hurt us, frankly, in the quarter was China. So that China continues to be a drag because of VBP, both in neurovascular having an impact, also impacting our spine business. So China continues to be a bit of a drag. But in spite of that, we had really terrific growth. in international. And I'd say that Mako is really starting to pick up steam in Asia Pacific. So we already have a pretty good presence in Europe, but in Asia Pacific, Japan, India, China, it's really starting to pick up. And I think that's a great leading indicator that will produce really terrific growth, both in hips and knees for many quarters to come as that momentum continues And then as well, the camera launches of 78. That's also really exciting for the international market. So we're going to continue the progress. Even Europe had another strong quarter. That's just kind of expected now. It's steady and strong growth every quarter. And we're still not where we'd like to be in Europe. So this is just one of those things that takes time. But if you think about something like cameras, when we started the transatlantic model, we were number five or six. And we expect to take over number one sometime this year. Our power tool share was in the low 30s, and it's crossed 50%. But it's still not where it is in the United States. It's not where it is in Australia. So international should be something that continues in a very steady way, just as it has the last five years. It's been kind of very consistent. And in emerging markets, that's the area where we have the most opportunity, where we're still very, very small, growing nicely, but off a small basis.
spk18: Thank you so much.
spk20: Thank you. We'll take our next question from Travis Steed with Bank of America.
spk13: Hey, thanks for taking the question. I'll ask both of mine up front. Some of the payers and providers have talked about a slower July. I was just curious if you could kind of frame some of the summer seasonality, if you're seeing more normal seasonality or how it kind of compares given some of those payer comments. And then a margin question for you, Glenn. Just curious if we should use the second half operating margin this year as kind of a new jumping off point, since this is the more normal cost environment in the second half. Thanks a lot.
spk06: Listen, sorry, your sound quality was a little hard hearing you. I think you're asking about July, if we saw something strange seasonality in July. And, you know, we don't normally comment on one month. And I would tell you, you saw our raise guidance. Like, we're expecting a pretty good second half of the year. And I don't really want to get into one month. And sometimes you do have certain dynamics that happen. But there's nothing really important that I want to call out for the month of July. And then I think the second part was margin.
spk08: Yeah, Travis, can you repeat that in terms of the operating margin question?
spk13: Yeah, sorry. I'm just curious if the second half of this year is kind of the new jumping off point for margins going forward, just given that this is a bit more normalized cost environment in the second half.
spk15: Yeah, no, I would say, you know, a couple things. First of all, Q4 is always seasonally higher. It's our highest margin performing quarter. So I wouldn't necessarily say that that should be the jumping off. You know, I think if you back up from where our guidance is, you could sort of figure out kind of where we're angling to end the year at. And that would be the good jumping off point.
spk18: Great. Thanks a lot. Thank you. We'll take our next question from Danielle Antolfi with UBS.
spk09: Hi, this is Simon Nagan on for Danielle. Congrats on the strong quarter. Can you talk about some of the puts and takes to the underlying ortho market growth when you look at factors such as pricing, innovation, and potential trend towards treating both much younger and much older patients?
spk18: And I have one follow-up. Yeah, look, the trends aren't different than what we've seen in the past.
spk06: It's surgery demand, backlogs of surgeons that people, frankly, the older patients who've been now really want to get procedures done. There are more active people out there, as I kind of referenced earlier, who want to get their procedures done. So innovation wins the day, right? So the robotics continues to be a real terrific for us and continues to increase utilization Percent of MAKO procedures done continues to rise. Percent of cementless continues to rise. Percent of hips being done on MAKO continues to rise. So that's not new. Those are a continuation of prior trends. And so there isn't some kind of new dynamic. It's just the pent-up demand of patients that we kept waiting for. They're coming, and they're going to continue to come for some period of time. And the aging population, people every day, some 10,000 turn 65. And so there is demographics that are on our side. There's the hangover from COVID that's on our side. And for Stryker, we have a portfolio that we're really excited about. And addressing the direct anterior with our insignia stem was critically important. And we've done that and we're seeing fantastic uptake of that hip stem, which is driving terrific growth in hips. So that's kind of new for us is that if you look in the last year, our hip growth has really picked up. And that was really because of a product that we launched, really addressing an important and growing segment of the procedures in HIPS.
spk09: Thanks so much. And just one follow-up really off of what you were just talking about. Looking at the competitive position in large joints in the United States, how do you expect to continue driving share gains, and where do you see yourself given continued innovation?
spk06: Look, we really like our chances. The huge demand for Mako hasn't stopped. We know we have the best system on the market, which we're really excited about. We've filled our gap with Insignia on the hip side. We have an awesome 3D printed hip cup with Trident 2. We have the cementless offering, which, of course, we're way ahead. Huge head start on cementless. Terrific publications coming out with excellent five-year data on cementless, which will give surgeons even more confidence in that in the future. And there's other things the team are looking at. We have some really exciting products on a hinge product that we're going to come out with later this year to shore up revision. And that's pretty exciting. We have plans to have revision on Mako as well in the not too distant future. So we're not going to sort of sit tight on just everything we've already done. There are incremental additions. Not so long ago, we launched the 2.0 software for Mito to improve the user experience, improve the training of residents. And so we think we have a winning hand, and we're going to continue to play that hand.
spk20: Thank you. We'll take our next question from Mike Madsen with Needleman Company.
spk04: Yeah, good afternoon. I want to ask one about the Q guidance system in Spine. Sounds like it's doing well. I'm just wondering if you could maybe give us sort of an overview. I know you've had navigation systems in Spine before. Is this something kind of different, or is it more just the latest version? And then how does it kind of fit in when you do bring Mako into Spine?
spk06: Yeah, what I tell you is this has the fastest camera on the market. Homegrown, we didn't use the third party to do this camera. It is lightning quick. And that camera will eventually be ported to the Mako as well. So that Mako will have that same terrific camera. It really, the user experience is terrific in terms of being able to see and being able to do your procedure. So the feedback we've gotten is outstanding. So we've always been good at navigation, but this is sort of really putting our best foot forward. And this user experience that you're going to have with Q will transfer to the Mako spine. And that we're really excited about. So even before Mako is already having an impact. And we think once Mako's launched, it'll really fill this important need in the market for us to have a robotic application. We also have another product in enabling technology coming out of our instruments vision that's going to be used by the spine group. A little early for me to give you details on what that is, but At the appropriate time, we'll tell you about that. So that combined with Mako is going to give us very compelling enabling technology platform for Spine.
spk04: Okay, got it. And then, you know, just given the guidance, I assume this is really kind of a material issue, but I thought I'd ask about it anyway because we've heard about it from some other companies. But can you just comment on any Russia exposure you have and whether or not there's, you know, the latest sanctions are having any sort of impact on your business?
spk06: Yeah, obviously we're abiding by all the sanctions, as you would expect, and working in lockstep with the industry on an industry-wide response to what should be humanitarian products and should they go through the approval process. That's obviously very lengthy. It did have a negative impact, but honestly, our Russia business is so small that it's kind of meaningless in the overall picture of Stryker. But yes, we are abiding by the sanctions. Yes, it did have a negative impact, but it was really...
spk18: It's not a material business for a superstructure.
spk20: Thank you. Our last question will come from Richard Newiter with Truist Securities.
spk11: Hi, thanks for taking my question and congrats on the quarter. Kevin, I think a few months back in the first quarter, you were asked a question at an investor conference about You know, what areas could be of interest to you? There's so much going right across your existing businesses. So, you know, obviously M&A, though, is still top of mind. So I'm just curious kind of where are the holes and, you know, where do you think the investment could be most incremental for you?
spk06: Look, it's a good question. I think I've talked about the adjacencies that we're interested in. First and foremost, there's a lot of tuck-in demand. Each of our businesses are building their wish lists and evaluating different targets. I think that's job one, is looking at those near-term targets that tuck in. Those create tremendous financial returns for Stryker. They don't always move the needle for the overall growth, but they're really terrific financial deals for us to do. When you feed our existing sales force a striker, we know how to sell, and we're able to really do that very, very well. I would tell you in the adjacency space, no change to the adjacencies that we're interested in. I think I've mentioned them before. I would tell you is neuromodulation is one I've talked about in the past, and within neuromodulation, obviously, there's a lot of different things. parts to that. There's spinal cord stimulation, there's deep brain stimulation, there's peripheral nerve stimulation, and there's eating stimulation, as you know, in sleep apnea. And I do believe electrical treatments is going to be a big part of the future. You know, over time, we've been a little hot and cold on spinal cord stimulation. I would tell you right now, we're probably a little bit more cold on it, just kind of a challenging market. And so that's really the only thing maybe I haven't said in the past. But otherwise, every other adjacency I've talked about that I talked about in Q1 are still very much on our radar screen. And as our cash frees up probably more into next year, if the tuck-ins aren't of a significant size and we have cash starting to build up in our debt position better, hopefully we'll be able to make a move in one of those adjacencies that I've talked about in the past.
spk11: Thanks. And then maybe just to follow up on Spine, it's one of the few businesses that That's not back in the high single digits or better yet. But you obviously have, you know, pretty good line of sight to seemingly transformative technologies and product rollouts with Mako. You know, but that's a year, year and a half away. So I guess, do we just kind of think of Spine as a grind from here higher or stabilization and then, you know, look out when 25 comes around?
spk06: Yeah, I think the word stabilization, I probably prefer that than grind, but yes, it's probably both, right? So spine is a tough market, no question about it. But already with Q Guidance, we're feeling good about that. We've bolstered our expandable portfolio a bit. We still have a couple of gaps that we're looking at, obviously would like to fill, but the enabling tech is really what gets us excited. And so I think the robotic platform will put us on a par at least. with the competitors. And then this other secret launch I talked to you about from coming out of instruments, which we've shown some surgeons, kind of will put us ahead of the game on enabling technology. But yes, we have to wait. Unfortunately, it's not ready yet. It's coming. The instrument launch will probably come in before the Mako, and that'll be able to be used with the Q guidance. It'll be compatible with Q. So you'll hear about that probably earlier than you'll hear about Mako. But, yeah, I wouldn't assume we're going to try to kind of keep in line with market growth, which is kind of what we're doing right now, hold our own until we get to that period of time, and then we could start to grow more like a typical business of Stryker.
spk20: Thank you. At this time, I would like to turn the call back over to Kevin Lobo for closing remarks.
spk06: Thank you all for joining our call.
spk18: We look forward to sharing our Q3 results with you in early November. This does conclude today's Strikers second quarter earnings call.
spk20: We thank you for your participation. You may disconnect at any time.
Disclaimer

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