Q2 2020 Stryker Corp Earnings Call
2020.
Okay striker earnings call. My name is Michele and I won't be your operator for today is called at this time, all participants aren't I'll 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'd like to ask a question. Please <unk>.
And one on your Touchtone phone. This conference call is being recorded for replay purposes before we begin I would like to remind you that the discussions. During this conference call will include Fort looking statements factors that could cause actual results to divert materially are discussed and the company's most recent filings with the S. E C.
Also the discussions will include certain non gap financial measures, we can celebrations to the most of directly comparable gap financial measures can be found in today's press release that is an exhibit too strikers current report on forums H K. So today would be S. E. C. I will now turn the call over to.
Mr. Kevin logo, Chairman and Chief Executive Officer, You May proceed Sir.
Welcome to strike or second quarter earnings call, joining me today or Glen mainline striker CFO and Preston Wells, Vice President of Investor Relations.
For today's call I'll provide opening comments, followed by Preston with some perspectives on the recovery trends across are diverse businesses.
Glenville, then provide additional details regarding a quarterly results before opening the call to Q&A.
I should begin today's call I would like to start by thinking all our employees for their continued commitment to ensuring the safety of their colleagues their families and our customers I'm very pleased with the resiliency of our organization, which has maintained high employee engagement and customer connections through the pandemic.
From ourselves forces would remain present, an essential to the doctors and character Jose support.
To our manufacturing teams that I've worked around the clock to optimize supply with ever changing demand.
And a cross our workforce most of whom continued to collaborate virtually.
The striker spirit remains alive and well.
Our second quarter sales declined are gonna hit by 24%.
Reflecting the impacts of cold at 19 across all geography, and the majority of our product lines.
The results reflect progressive improvement.
We're all sales.
Through the quarter, but do vary by region.
The sequential improvement can be tied to the initial cancellation and subsequent gradual return electric procedures during the quarter.
As I mentioned and her first quarter call. We took aggressive steps early on to ensure the safety of our employees and customers, while managing discretionary spending across our P&L in response to the slow down and sales.
Our cost containment measures, including significant productions and traveling meetings.
Slow down and hiring and salary reductions across senior leaders.
In addition, we made other efforts to focus on cash conservation.
Putting the idling, a select aquatic lines and facilities across our network starting in me.
These actions combined with ourselves performance resulted in adjusted earnings per share of 64 cents, a decline of nearly 68% versus the prior year.
I shall we look at the quarter the low point in sales occurred in April and then improved sequentially through the end of June.
As a reminder, implants and disposables represent about 75 per cent of ourselves.
And small capital represents 16%.
Small capital generally mirrors, the performance and trends a implants N disposable.
The largest improvements within the quarter wearing hips knees spine trauma sports medicine and Neurotechnology.
Reflecting the resumption of electric procedures and the gradual opening a previously locked down communities N geography's.
With respect to our large capital businesses medical capital makeover standouts, both posting strong girls to the quarter.
R. A makeover biotic technology remains in high demand with our customers despite any financial constraints, resulting from the pandemic.
My geography, Japan in Canada performed well.
[noise] Europe, China in Australia showed progressive improvement screw the quarter.
In contrast, Latin American India continue to be a weaker as the impacts of Kobe 19 remained more widespread in those regions.
Q3, we expect the recovery to continue.
But do not expect it to be linear while local governments deal with varying degrees researches.
R. I N D programs continue to proceed despite logistical challenges caused by the pandemic.
And we spent at a healthy right in the corner.
We are actually engaging with our customers, while ensuring that our product supplies and a strong position to capitalize as procedures resume.
However, given the fluid nature of the situation, we are not providing Q3 or four your guidance.
We are proceeding with integration efforts regarding the right medical transaction, we are working cooperatively with the regulators to obtain the necessary approvals for the transaction, including that's previously announced proposing to divest our start total ankle replacement product.
This process is well underway and D U K competition markets Authority recently announced that it will consider our proposed undertakings and Lou how the phase two investigation.
We continue expect to close the transaction around the end of Q3 or beginning is cute for.
Please note beyond this update will not be taking any questions regarding right medical or depending transactions on today's call.
This has been the most unique situation that most of us I've ever experienced.
While we have been impacted financially as I was also the government shutdowns under froze or electric procedures.
This time is also allowed us opportunities to reevaluate and develop new ways to work and collaborate across are diverse group of businesses.
We are prepared to emerge from the pandemic stronger more efficient company.
I remain constant and our people our culture and our ability department with our customers to meet the needs of the many patients they sugar.
And now over to Preston.
Thanksgiving.
My comments today is more focused on providing additional insight into the current environment and how certain countries and problems perform during the quarter.
We saw progressive improvement in fail throughout the quarter with April being the low point be improving trends were primarily driven by the resumption of electric procedures.
That momentum continuing is a Q3 is July that's traveling better than union.
We estimate that approximately 40 to 50 per cent of our total global revenue includes procedures that are considered elective.
Or more accurately can be in many cases deferred for a period of time.
This is primarily include.
Any extremities fine sports Medicine, and R E N T business.
Geographically electric procedure recovery varied depending on the government actually and severity of depend on it.
In addition to the U S countries like China, Australia, and Germany, I'm also shown month to month improvements is elected procedures returned during the corner.
Where you can approximately 80 590 per cent of pretty comes with.
D U K, India, and Latin America lab during the quarter at less than 50 per cent covered levels and the pandemic continued to spread in these countries.
During the quarter, we saw strong demand for a large capital products physically daddy's and stretches within our medical being an ongoing high demand for our makeover biotechnology.
And the second Florida, we we're very pleased with tomato installations in the U S, including increased sales to a S E and competitive accounts.
We continue to see a growing percentage about hit and knee replacement surgery is being performed with a make a robot.
As it relates to me there is an ongoing shit towards tomatoes.
We also launched a new software upgrade for the make I'll get the program that includes features which improve the overall ease of use.
Our leadership in order to peanut robotics, a strong order ball and a solid innovation pipeline positions as well cause he continued above the market brown enjoy a replacement.
While we have made me for reduction in many discretionary send items are investment in our N D remains robust.
<unk> <unk>, a new product introduction.
During the first half of the year, we are pleased with the customer feedback and resolved from several new products. Some of which include finds Niagara lateral system.
Many fries cleaning and drama.
[noise] Neurovascular, Rebecca 71, and 74 intermediate catheters, these and other launches will contribute to our performance for the rest of the year and position us about for the future.
Although the code in 19 pandemic has led to a slow down and electric procedures. It has also played increased emphasis on the safety and health care providers and your patience.
Over the years me, a milk and extensive portfolio within our medsearch businesses addressing many of the challenges our customer face with a focus on accident, an infection prevention and care of them or safety.
This includes products like our patient hygiene and isn't that being brought us personal protective equipment.
Management and smoking population devices, along with the Lucas chest compressions system, which delivered high quality automated C. P. R. While reducing the proximity of the caregiver to the patient.
With the ongoing threat, that's probably 19 infection. The department of defense identify automated compression devices, such as that Lucas device. That's the best practice and deliver your C. P. R.
Man for these products grew during the quarter in response to need some cream and concerns.
We will continue to leverage are diverse portfolio to address changing trends and meet the expectation of our customers caregivers and.
With that I will now I'm trying to call over to go.
Thanks Preston.
Today, I will though cause my comments on our second quarter financial results related drivers and liquidity matters.
Are detailed financial results have been provided and today's press release.
Our organic sales decline was 24 per cent and the quarter. These results included a decline in the U S. A 24 27 four per cent and an international decline of 14.5%.
That's a reminder, this quarter included the same number of selling days as compared to Q2 2019.
And the quarter was I'm favorable 0.2 per cent from the prior year quarter and foreign currency had an unfavorable.
<unk> eight per cent impact on sale.
During the quarter, our groceries significantly negatively impacted by reductions an elective surgeries the effects of shelter in place orders across many geography's and the pause in hospital capital spending is the medical community navigates this pandemic.
Throughout the quarter, we saw progressive improvement in the expansion of elective surgeries across many geography's, which resulted in significant variability in ourselves.
An overall bases ourselves declined range from minus 36 per cent and April to minus 10 per cent N G M.
Our adjusted quarterly E P S.
64 cents represents a decline of 67 seven per cent from two 220 19.
Foreign currency impact on second quarter U P. S was minimal certain other factors resulted in disproportionately negative impacts on V. P S, including the loss of higher Martin sales and a loss of leverage related to manufacturing and operational fixed costs.
[noise], where partially offset by a strong focus on discipline to cost control within the quarter.
And will now provide some brief comments on segment cells.
Orthopedics had constant currency in organic sales decline of 29 three per cent.
This included a U S decline of 28.8 per cent.
We saw declines across our hit me in trauma businesses.
We also saw very strong growth in our Mako business somewhat offset by declines in bone So man.
Internationally Orthopedics had an ORC panic decline of 34%, which reflects the downturn in electric procedures across most geography's.
Medsearch had constant currency decline of 16.4 per cent and organic sales decline of 17%, which included a 22.2% decline in the U S.
Instruments at U S organic sales decline of 38% driven by power tools waste management and search account.
This was partially offset by increases and instruments P. P E products, namely our flight helmet and other protective products.
As a reminder, instruments also had a very high comparable to two 2019 with 19% growth.
Endoscopy at U S organic sales decline of 34.1 per cent. This reflects a slow down and it's video general surgery Communications and sports medicine businesses.
The medical Division had U S organic growth of five 4%, reflecting strong demand across it's bad an emergency care businesses, resulting from demand tied to cobin 19.
Which was all set by declines in sage related to less patient fluffy.
Internationally Medsearch had organic sales growth of four six per cent, reflecting strong demand for medical products in Australia, Canada, Europe and emerging markets.
Neurotechnology and spine had a constant currency decline of 28 nine per cent and an organic decline of 29, 9%.
R U S. Newer tech business posted the constant currency decline of 36 four per cent and a 37 five per cent organic declined for the quarter.
This reflects a slow down and procedures in the corner related to all our narrow tech businesses.
The decline was most pronounce in R. E N T neurosurgical and C M F businesses.
Internationally, Neurotechnology and spun and had an organic decline of 13 per cent.
Reflecting slowdowns in Europe, Canada, and emerging markets, which was all set by a solid performance and our neurovascular business.
Nah, we'll discuss operating metrics in the corner.
Or just the gross margin of 57 three per cent was unfavorable 850 basis points from the prior year quarter.
Compared to the prior year gross margin was unfavorably impacted by fixed cost absorption in business mix.
The fixed cost absorption was significant and related to certain costs associated with idle manufacturing that normally would be capitalized and the inventory.
During Q2, we operated at 60% of normal capacity and they're related unabsorbed cost diluted are margin by approximately 400 basis points.
We anticipate Q3 will be at an average capacity of approximately 85%.
Unabsorbed costs will continue to impact on margin until our manufacturing is operating at normal levels.
Adjusted R&D spending was seven six per cent of sales are adjusted SG&A was 37, one per cent of sales, which was 360 basis points unfavorable to the prior year quarter compared to the prior your SG&A within favorably impacted by business mix and deleveraging of selling in marketing costs, partially offset my.
Alrighty expense savings actions taken during the quarter.
In summary for the a quarter or just it operating margin was 12.5 per cent of sales.
The measures we enacted in March covering most of our discretionary spending including curtailments in hiring travel meetings and consulting as well as the idol of menu certain manufacturing lines and facilities, including Furloughing. The related workers continued throughout the second quarter.
Related to other income and expenses compared to prior year quarter. We saw decline an investment income earned on deposits and interest expense increases related to increases in our that outstanding.
Our second quarter ahead, and adjusted effective tax rate of 14.4%.
Turning to cash flow liquidity, we ended the second quarter with cash in marketable securities of six 6 billion, including for 6 billion related to <unk> medical funding.
And generated approximately $620 million of cash from operations in the quarter, which was ahead of our internal targets.
This reflects earnings and a reduction in working capital primarily driven by accounts receivable during the quarter.
As I noted in January we did not repurchase any sugars and two one nor do we plan to do so the remainder of the year.
The actions that we implemented in the first quarter to conserve cash continued in Q too and included discretionary spending controls reduction in playing capital expenditures in project spending focusing on opportunity opportunities in accounts payable and slowing M&A activities.
Concerning our cash holding can available credit lines are liquidity from illiquidity standpoint, we continue to be well position.
We currently have available credit lines, none of which are drawn on at this time of approximately 3 billion.
In addition, our investment grade credit rating supports good access to the capital markets and we have taken advantage of historically low rates to execute additional funding in the corner of approximately 2.3 billion for the right medical transaction.
As it relates to this transaction, we estimate completing the required funding and the third quarter with the execution of up to an additional 1 billion.
In terms of other future capital requirements are quarterly dividend is approximately 215 million and we have one 300 billion bond maturity too and cute for.
As it relates to guidance for Q3 in the full year. We reaffirm are previously announced decision to withdraw guidance given the continued significance of uncertainties at this time.
Will continue to evaluate operating circumstances and the market environment for stability prior to re institution of guidance and now I will open it up for Q&A.
Oh.
Okay.
Thank you.
Question and answer session. If you have a question.
One.
Telephone keypad.
If you wish to me.
Please.
As a reminder.
Lemonade.
And one.
Your first.
It comes from the line of.
Credit Suisse.
I'm sorry. Your first question comes from the lineup Hopkins from Bank of America.
Thanks can you hear me okay.
Yes, we can't off yeah.
Great Okay, Kevin impressed and thanks for taking the question first question is if I heard you correctly that June revenues were down 10% for the whole company.
Can you give me a sense as to how variable the growth was within divisions for June I'm sure folks would love to hear kind of how hipster needs to get in June relative to that 10%.
Yeah sure. Bob. This is this is Glenn I I think in general you know, we're not giving specific guidance, but.
That minus 10% is directionally correct across most of our businesses and then we fully expect to see continued momentum moving until July.
Remind is zero is kind of what we're hearing from a lot of your peers.
I know you're not giving full guidance, but is there any reason to think that stryker might be way outside of that band is that the positive or negative given what you're seeing your business.
Bob There's a reason we're not giving guidance right because we just don't know what's going to happen in the future, but there isn't any reason to think that there's something wildly different about our business.
No we performed slightly better than the market.
Good and 200 basis points on topline we've done it for eight years in a row you should expect us to continue to have the same type of performance.
And it really does depend on what the market does and once we have a better visibility will give guidance, but theres nothing unique about our business that would cause us to be wildly.
Idling.
Okay. Thanks for that appreciate it.
Pardon the interruption.
A few logistics.
[music].
Okay.
Thanks.
Okay.
And your next question comes from the line of David Lewis from Morgan Stanley.
Hi, Thanks for taking my question I, just a couple from me here I would be one on capital one strategic for Kevin Kevin just on that the broader capital environment. Im just curious you need to station. This afternoon of small capital versus large capital I wanted to just give us a sense of how you see the capital management, how hospitals are reacting to the cares act, helping a lot of investors are concerned about.
No significant volatility or lack of demand for certain types of products, maybe you could help us with sort of small capital large capital with maybe some emphasis on.
The bed business is very strong specifically strong internationally in how durable you see that business in a quick follow up.
Okay, great well, so first of all starting off with the cares Act. So 175 billion. That's been authorized to go to hospitals only 115 billion has actually been dispersed. So there's still another 60 billion to be dispersed and thats. Prior to the next round of legislation rights and the next stimulus stimulation package will add to that.
And so money is going to the hospitals, we were really pleased with the performance of medical obviously small capital tends not to be as much of a worry they needed to do the procedures. So thats why it tends to trend very very closely with elective procedures are they need power tools to do the knee replacement they need to cameras to do the general surgery products, so that tends never could be really.
It's too much.
More of the large capital it tends to be the constraint.
But because of the growth of our US a lot of our large capital in terms of beds and structures were actually necessary and we saw those being purchased.
Maaco was really a pleasant surprise in the quarter to see the amount of.
Robots are able to install there anything there was more financing than normal I would say in a in the second quarter as hospitals tried to conserve as much as short term cashes as they could.
But it's hard to predict how this is going to play out over the course of the year I would say for now we are feeling very good about of the state of our businesses internationally, we had a terrific performance out of medical and a lot of that is that governments around the world really saying. This is really important to have Lucas just compression devices very important to have.
Few beds etcetera, and so we had debt just a terrific performance. We also don't have stages is a much smaller business for medical outside the United States. So that weighed heavily on our U.S performance, we actually had strong.
Medical capital in the United States, as well, but but we're feeling very good about the state of the capital.
Business, it's not like the last time, where you didnt have this content stimulation from the government.
Two took off going directly into hospitals and hospitals very motivated to tick to increase their procedures.
Okay very helpful and then Kevin as we head into next year, you seem very committed to the Wright medical transaction. So as we head into 21, new strikers balance sheet will be the most levered. It's been in most recent memory certainly so one of the hallmarks of the business has been the ability to be flexible and go after growth oriented M&A and you've been in one of the two top most active acquires and large cap.
Medtech, so how should investors think about your ability to do deals and 21 and beyond for 21, and 22 and should data will be concerned about the inability to do deals having an impact on the growth rate over the next couple of years. Thanks, So much.
Yes. Thank you. So so clearly we'll be at a high leverage point and we do have intention is to start paying down that that but we havent stopped our business development teams. There is still out looking your targets I would expect that they would won't be.
Certainly as large as the some of the targets we've done more recently.
You should expect us to continue to be busy with bolt on type of acquisitions and as you saw we had a really strong performance in cash flow in the second quarter as we generate cash will be able to both pay down debt and stay busy in the M&A market.
Well.
Your next question comes from the line of Joanne launch from Citibank.
Hey, thanks, everybody.
Two questions. The first one is easier at particular segment that you receive recovering faster than others.
And the second question really is as you look into next year.
Help help me understand how to think about the financial model and sometimes normalcy.
Thanks.
Well I think we were pretty clear in the opening comments that that our business is really recover with the recovery of surgery.
And so as surgeries come back.
All of our businesses are sort of resuming at a very similar pace. We don't have huge variability I would say early on in the pandemic NT because of his aerosolized procedures were clearly the hardest hit.
And then the hips and knees were sort of.
Next hardest hit but I would say now it's not as the economy's reopening were really getting.
Nice uptake across a full portfolio, there really isn't that much variability as it relates to the elective procedures capital is a little bit different so in large capital area, the booms and lights and that type of capital wasn't as robust as it does instructors and maaco. So there is some variability, but but again not not.
Two dramatic and so I think you're going to see our business kind of come back as the economy comes back in a fairly synchronoss manner.
And then I wasn't quite sure I got your question about next year's financial model joined can do you mind repeating that.
Sure I'm, just trying to look past this year in Conway.
Yes, you are evaluating stock on 2021 and contains that's coming to you.
So I'm just trying to think of how do you think about next year and it can be qualitatively or quantitatively.
Okay.
Sure.
Glenn I think your muted.
Hey, sorry, Joanne I was unit.
I gave you a great answer though.
Hi.
Yes.
Hey.
Now I'll ask me qualitative to 2021.
We're not really looking to guide just yet and expect that that will happen. After we have our Q4 earnings call, but as we think about it is we think about next year. We do think that there will be a progressive recovery more optimistic based on what we see right now and so that we will obviously play poured into 2021.
From a cost structure standpoint, we are sort of experiencing.
New ways of working and being more virtual and obviously saving on travel and other things I think there'll be lots of examples of how that might play into our operating structure in the future.
No. We currently regarding Hancock or made up of our senior leadership team that is really looking at the latest laser welding rate and how we might come back. So I fully expect that you know as we look at our financial model and our operating structure for next year, we'll we'll expect to see sort of the impact of some of that.
Thank you.
Yes.
And your next question comes from the line of Matt Miksic from Credit Suisse.
Hey, guys. Thanks for taking the questions.
I had one one follow up on on Mako and robotic surgery, Kevin you'd mentioned a couple times the strain.
In the quarter and we rewind back to the beginning of Q2, I think there were questions as to how.
Active hospitals would be in bringing in new systems and it sounds like it's kind of a much stronger can you talk a little bit about maybe.
The mix through the regional aspects of the strain.
And how you're pushing to assay is this sort of assay offering strategy is playing into that and one follow up on on spine.
Yes, sure, Matt, we're not going to get into specific numbers as we stopped providing that as you know on a couple of quarters ago, but I would tell you that we had slightly higher competitive placements than than we had typically before and a bit more activity in the agencies and we've been selling to the issues before so thats not new.
But clearly there is accelerating trend towards PSC. It was already starting to ramp and I think a pandemic is causing that's increased further.
Keep in mind, Theres still only about 5% to 10% upon joint replacement procedures done and assay. So even though the ramp is picking up it's going to take time before it becomes a very meaningful portion or procedures, but but I would say those are the two areas that were ever higher than normal was asked season competitive accounts and then what I'd tell you is overall I was I was pleasantly so.
As you know not knowing how hospitals were going to react.
Our team did an awesome job in the quarter of being able to place a lot of robots and and even though some more of them more financing. The normal were totally fine with that that's been part of our office for a long time.
Hospitals understandably are trying to preserve their options, but the demand and the pull for maaco is very strong. The order book is also very helpful. So this isn't just a one quarter issue and and that augurs very well for us as every time, we placed on Mako.
For the percent of procedures done on the robot is increasing and and the trends, especially for our needs. It tends to cause an increase in cementless as well. So those trends are continuing to rise. So it's it's lifting all boats within joint replacement.
Thanks, It's great to hear and then on the spine side. Just curious if you have any color on sort of seasonality.
In the summertime summertime months, particularly now with gave us under under the Hood at Stryker. There is this kind of upswing in and in scoliosis surgery and I'm wondering if you'd seen that's or seen any trends finance fees are stronger cervical stronger lumbar given given just the.
The the challenges early in Q2, and how that shaping up heading into Q3 year.
Yeah, it's such a messy quarter honestly with some good all of the closings that are happening shutdowns that scoliosis, obviously, a seasonal every year and thats one of the crown jewels of the K, two and portfolio because their complex deformity systems, but there's nothing unusual that I would I'd want to call out and because there's so much noise, it's really hard for us to.
Parse that out.
Good.
There's just a lot of noise and as it relates to cease obviously spinal procedures are done in the US is that's not giants today, I think that will increase in the same way that it's increasing in large joint procedures.
Fair enough thanks, Kevin.
Thank you.
And your next question comes from the line.
Yes.
From Evercore ISI.
Okay.
Hey, guys. Thanks for taking my question Congrats on solid.
Solid excuses air Glenn maybe the first one for you.
I think I heard some comments around capacity utilization on the manufacturing side being 60%.
In Q stepping up to 85% in net CQ.
One I want to make sure I heard those numbers correct and.
In.
The implication on the gross margin side no is the implication that you step up by a couple of hundred basis points, because now you're absorbing manufacturing variances.
Better.
Yes.
Yes, Hi, VJ.
Yeah, you actually you heard those numbers right.
Yesterday was around 65% on average for Q2, and we actually do see it stepping up on an average to about 85%.
Q3.
That in Q2 was about a 400 basis points impact in terms of sort of fixed period costs that we had expense as a result of some of those idlings.
You could probably do the math on that number relative to the 85% in Q3 and come pretty close to what we anticipate.
The amount will be keep in mind, though that that we're we're forecasting where we think the ramp might be.
And where it actually might be could be somewhat different and that certainly would impact.
How we ramp up manufacturing.
I was about to say the step up and not capacity as a proxy for revenues, but thanks for clarifying that ive to Kevin one for you.
You know if I had to get through month out of set up pricing is going to be quite bad. This is really quite remarkable how pricing is figuring out.
How much of this is a function of perhaps better discipline on your part in the industry in general or is there something else going on in the thank you.
Yes. Thanks for the question, we've been focused on price for a long time and as you've seen over the past couple of years pricing overall has has moderated within our overall portfolio. So part of it is certainly our efforts and.
And part of its just a stable environment the pricing environment has been fairly stable for some period of time and obviously our portfolio also has evolved over time and with our portfolio being a higher percentage of med surge relative to the total and and really some great discipline showing in some of our divisions. If I look at our see enough business sense example that.
Terrific price discipline, and a lot of great innovations that we'd be launching that continue to Tim and good prices and.
And so we're going to continue to focus on that and we continue expect a pretty stable pricing environment going forward.
Thanks, guys.
Okay.
And your next question comes from the line of Robbie Marcus with JP Morgan.
Great. Thanks for taking the question.
I wanted to see if we could spend a minute on two areas that Miss Street numbers by a good amount.
Narrow attack and instruments and I was wondering if you could add any extra commentary I know I guess people weren't taking into account how much on some of the yen team might have been down in the quarter, but any other color you could add on instruments in aerotech and the trends there obviously related to covert but just any color you could add.
Okay sure I'll take the fund Aerotech part and then I'll, maybe I'll ask Glenn to comment on instruments. So within Neurotech. We have four businesses. So we have our neurovascular business, our patio maxillofacial business, our neurosurgery business, which is think about the neuro powered instruments and our portfolio neurosurgical products and TNT.
So within those four businesses a lot of.
Neurovascular is the largest on a global basis, but it's very it's more heavily weighted to your two outside the United States. So roughly 60% plus of their sales are all U.S. So in the U.S. you have a much higher waiting on NT, CMS and neuro surgical all three of which.
Obviously were heavily impacted by that pandemic.
Neurovascular was less impacted by the pandemic.
Conversely, those three businesses don't have very high percentage of their sales outside the United States.
So when you look at and Neurotech basket. The you can see that impact.
International being much better having much better performance and in the United States, just given the mix of those businesses, but that's I think perhaps why a lot of times.
Speaking to investors, sometimes take a sort of simplify that neurovascular.
As the neuro Tech business, but it's really just one of the for businesses and the anti was the most heavily impacted business.
Of all of the business of Stryker, given the Aerosolized and procedures.
And then Glen do you want cannot instruments.
Sure sure on on instruments.
You know there they are primarily.
I have two very large segments, one of those being orthopedic solutions, which is.
Powered instruments that are primarily used in orthopedic procedures and then the other surgical technologies, which.
As our safety products, our waste management products.
Obviously, the orthopedic solutions scaled down.
Downward with just the elective procedure dropbox in orthopedics on the surgical technology front I would tell you that yeah why some of their equipment was significantly down their personal protective equipment and products that relate to that did very well.
I would also tell you that and I suddenly said this in my earnings script that.
Last year instruments grew almost 19% in the quarter and so it was a very very high comparable and bar that they would have to overcome too.
To even come close to growth and I think I think you see that impact in the decline may have fourth quarter.
Appreciate that and maybe just a quick follow up on you guys.
Spend a billion dollars in R&D and have a very active pipeline. We've heard from some of the cardio names that have bigger trials with on a timelines that they're seeing about six months delays. The R&D is down modestly in second quarter, how should we think about any potential delays to the pipeline.
At all at Stryker. Thanks.
Yeah, I wouldn't expect much in the way of delays.
Some of the reason for the lower spending is just access to labs to do testing and so the pandemic did crimp us a little bit, but but very modestly and keep in mind that you really only have two divisions that appear may products, our neurovascular division and in our physio control business.
I may products are the ones that really do demand those clinical trials and.
And we just have launched a series of terrific products with the neurovascular. So we actually have a innovation pipeline that that has is very very healthy and refreshed within neurovascular, we weren't on the cost, but something brand new.
In fact, we had some really great news in the last quarter on some new approvals. So our surpass evolved which is our newer quota bearing stent was approved in the United States our original photographs sent.
The streamline was approved in China, and our Atlas Stent was also equipped in China. So that was all good news, but but don't expect much in the way of delays our product pipelines continue to March ahead, and I think the makeup of our business being much more clutch and K.
Gives us the ability to continue to launch products that are very healthy pace.
Great. Thanks, a lot.
And your next question comes from the line of Kayla Crumb from Suntrust.
Great Hi, guys. Thanks, so much for taking our question Tonight. So I know you're not going to talk about the star divestiture process.
Thank you set in a pretty interesting spot right now just having that that perspective that a company trying to divest of business, but also opening.
Robin to evaluating tuck ins at this time that I just to be curious if you could comment in a high level on the M&A market today.
Yeah, what you're seeing in terms that I've, just deal volume potential seller and buyer pool in that market, just as compared with perhaps what you had any or though.
Well I think depends Emmett caused a slowdown clearly.
A lot of activity that slowed down we slowed down our own activities to some degree continue to evaluate targets, but put a pause because obviously we were in sort of cash conservation mode not knowing how long is it's going to go encore.
But I would say artist start, but 80 teams are just as busy as ever engaging with targets and I think this this will come back just as it always has in the past are still a lot of companies within Medtech, a lot of small and smaller and innovative companies and and we're going to continue to be busy the divestiture process relates to the the regulatory.
Process for the deal.
And and we're going to continue to stay active on the beauty current obviously as I mentioned before we're taking on a lot of depth.
With this Wright medical acquisition, and so part part of our commitment with cash is going to get to pay down some of the debt, but but it won't be exclusively and we've told the rating agencies will continue to stay active on M&A, but it'll be obviously smaller tuck in type of deals for therapy within the near term.
Great. Thanks, Kevin and then I just would like to talk about on vendor consolidation, obviously vendor consolidation have been that trend over time, but I'd love to hear if you're seeing any uptick in that more recently is that kind of got more often in conversations with your hospital customer there or is it just kind of more at the same at this point. Thank you.
Yes, I'd say, it's more a bit more of the same at this point hospitals are have been looking to consolidate vendors by service lines. We've re actually embraced that approach because we're very very deep in each of our service lines and category leaders within the segments that we plan.
We are seeing with our assay offense that having everything that has seen needs, whether its booms and lights and operating tables nickel robots as well as implants really does give us.
A terrific position.
Sees so that's an area that strength, but I would say overall not much change.
Great. Thank you.
And your next question comes from the line of Larry Biegelsen with Wells Fargo.
Good afternoon, thanks for taking the question.
Kevin.
Yeah I appreciate the the negative 10% growth.
Growth in June in the improving commentary.
For July I, just wanted to give you chance to to comment on this I assume people come off this call thinking that Q3 should be better than that negative 10% in June given the the June July trends that are you guys comfortable with that without saying, whether you'll grow or not but Q3 should be better than down.
On 10.
Well certainly if the current marketplace continues it will be much better obviously because july is trending better than June as we mentioned that as long as we don't have an outbreak and have to go back to shelter in place as long as this this trend line continues where.
Feeling good about Q3.
That's helpful. And then does that improvement in July also apply to the U.S. and and if so qualitatively how are hospitals in the U.S. dealing with the spike so that we're all obviously seeing here thanks for taking the questions.
Oh, Yes, it's certainly includes the United States and ER and obviously, we are businesses more heavily weighted to the U.S. and so has that U.S. recovery improves that certainly is terrific for stryker.
Even in Florida today, we're seeing hospitals, continuing to do surgeries and so that it's not as if we were we going through what we went through in April.
Im hospitals for the most part I've been pretty well equipped to their segregating, they're called it patients from there on the areas, where they can do surgery, I'm, not saying that universally some hospitals and Arizona. They chose to close elective surgeries down for a week, we saw that within the resumed a week. After so I think this notion of complete shutdowns I don't think we're going to see that unless we have some.
Type of ramp and change in the in the way the viruses mutating and spreading so I don't expect that I think we'll have flare ups and the reason we don't want to give guidance is it's hard to predict the nature of those flare ups and how big those labs will be.
But even today in here in Texas, and Florida, and Arizona surgeries are going on and that gives us cause for optimism.
Per certainly for Q3 and beyond.
Thank you.
And your next question comes from the line of Kristen Stewart with Barclays.
Hi, Thank you for taking my question.
My question regarding some of that I guess charges that you talked in the quarter four in process asset impairment says that you guys were spending some investments just wondering what what exactly I guess are used to spending if there any start up projects that.
R&D projects or anything like that that are noteworthy just to explain and then I noticed that you guys were taking some additional charges related to im not sure. If theyre just the European MDR or if there related to any sort of quality system impairment is there anything there on.
Worth mentioning just from.
How long I guess, you anticipate it taking these charges and just any update on kind of cash flows for the rest of the year. Thanks.
Okay, Chris and I will I will try to cover both of those in one fell swoop here.
So you're so you're right in the non-GAAP table you can see that we recorded charges of about 170 million and they were related to in process asset impairments product lines, and just sort of some other exit costs.
That really resulted from our decision to suspend certain investments due to pandemic related constraints I would tell you that the lions share of those costs than those in process costs were related to our 2020 ERP implementation.
Which we pause as a result of the pandemic and really just in accordance was kind of the accounting rules and due to all the uncertainties are the situation. We were unsure of what the restart date would be of our ERP project at this time and so thus we impaired.
Some of those related in process costs that had been previously capitalized.
And then on the other questions, Yes, we continue to.
Have costs that are related to.
You MDR.
And we'll have those flowing into next year that are just like everyone else.
Of our peers are recorded in our non-GAAP charges, and we expect that that.
That program will likely continue for for about three years.
And then on the on the cash flow Brian.
We I think if you look at our cash flow we just.
For the quarter, just really reflected good working capital performance you combined strong collections with relatively flat inventories. We continue to work with our vendors on payment terms and then all of that was complemented by just the discretionary spending controls as well as.
Measured capex spend and I think all of that combined.
To produce are really positive cash flow result for the quarter.
Thanks very much.
Your next question comes from the line of Rick Wise with Stifel.
Good afternoon and Kevin.
Units was that in your opening comments.
Something like we're prepared to emerge in the pandemic, a stronger more efficient company and.
Obviously single reason the doubt that you're highlighting cutting discretionary spend et cetera, focusing on the pipeline.
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Just curious what that means in your mind and what.
How we should hear you are are you, saying.
Rick as we get or to all of US are you as we get back to a more normal procedure environment, we're going to grow as we did and our margins are going to be what they were or are you, saying something more of that you're trying to position the company to grow even faster with even better margins because you're taking.
Special actions special initiatives to plan for that you see what I'm asking.
Well I noted like what you're asking in my CFO on licensing screen is waving his said, saying please don't give guidance.
So Rick what I would tell you I'll give you some qualitative commentary so the qualitative commentary is what that a pandemic has provided us is really shown us how effective we can be without having to to beat the high cost Hi travel company. We've been historically, we were very high touch culture, we're realizing that theres a lot that we can do virtually.
That will be permanent.
There's a lot of education admitted that some of that you have to do in person cadaver lab type, but there's others that that you don't you can do very very effectively and efficiently.
Virtually that the buildings and facilities that we have.
A lot of we're going to embrace flexible work arrangements going forward or we're not going to need to say real estate by any stretch that we have today and a lot of our capex over the past few years has been on office buildings and because of our growth and all the headcount we've been adding and all the companies within acquiring.
And frankly, we're seeing a big change in what's going to be required in the future. So those are all areas on the efficiency front and what I would tell you is this pandemic a shrunk our company.
Our divisions are collaborating more than than ever and I think the nature of the pandemic has caused our divisions to work more together and that's sort of one of the the untapped assets of Stryker is as we collaborate we're seeing it with our assay all sense, we're seeing it with the three D printing, we're seeing it with sort of technology areas, where.
Different divisions can tap into.
Enabling technologies as an example, and we're collaborating better than we ever had before and I think that will continue once we go back to let's say some more normal environment and it's really unleashing a different kind of potential. So I can't put a finer point on numbers related to this Rick but I I am feeling.
Tremendous momentum in the company.
And the culture is very strong and D. These changes are going to make us better as an organization going forward, how we use our those efficiencies that we regenerate. It certainly gives us confidence that we'll get back to the the nice op margin expansion will solve with the past couple of years.
Gives us tremendous clinical confidence, we can continue that but I, but I think theres theres some untapped potential.
In our divisions and our and through collaboration that we're going to start to see manifests itself in our results.
Interesting and Kevin just last one from me.
We haven't maybe focus to touch on this call on.
International you spent a tremendous amount of time rethinking Europe over the years, you highlighted that Latin America, India. So we we haven't touched much on China can you give us.
Just at a high level, what's your feeling good about what's your feeling concerned about as we think about the recovery or what initiatives you have underway. There just your high level thoughts internationally right now thank you.
Yes, sure. So first of all I would start off with the developed.
Countries internationally I feel very strong about that strong about Japan, Australia, Canada Europe. I mean, we are really in great position in that and all the developed markets, even Korea filled very very strong about our position in developed markets.
Emerging markets is the big area of opportunity for Stryker over the next 510 years.
I feel very good about the leaders we put in place we put in terrific leaders in our major part prior to countries, whether it's China, India, Turkey.
Latin America for sure just fantastic leaders and we had a terrific here in 2019.
We grew roughly 20% emerging markets. It was outstanding and I, we were really heading into this year with with the wind at our backs. Unfortunately that pandemic has has thrown a huge wrench into that when we talked about the problems in India and the problems in Latin America, they're really not stryker problems there pandemic related challenges that we have.
I am expecting us to get back.
Into into the winning spirit that we had towards the end of last year and I feel that because we have the right leadership in place we have the right kind of models in place we've gone a little bit more direct in some countries Turkey as a good example, we bought our distributor. So I do think we have the right infrastructure. It took US time right you remember for five years ago, we were struggling in the in May.
Any of those countries.
And but I do feel we're on a solid footing and we will recover as those those markets recover related to the spend on it.
Thanks again.
And your next question comes from the line of Matthew O'brien with Piper Sandler.
Good afternoon, guys. This is Patrick on for Matt. Thank you so much for taking the questions Im just one one for us, but I just would love to go back to the financing from they go specifically I'm curious about the flex financial program I know as Morry SCS acquire Makos systems, you talked about the staying in it.
Port elements.
For those placements, but ill have larger hospitals been using flex financial program as well and.
Or are you actually finding that things are operating on a more AD hoc basis. When it comes to some of these financing agreements you've been having with sound like systems any color there would be really appreciate it. Thank you.
Sure.
Hi, Patrick This is this is Glenn all I'll answer that.
You know what our flex businesses is as busy as it's ever been.
And I would tell you that just given the current conditions and maybe some of the uncertainties hospitals may have about their liquidity I think that the fact that.
We can use flex financial to sort of customized these financial options for our customers, It's certainly making making a very big impact on on those capital businesses I would tell you that during Q2 Maaco sales were were quite robust and we supported our customers through a variety.
We have financing options.
And then lastly, the last of the color I'll say is that just given the circumstances. We definitely are seeing a shift to financing more deals than we have historically experienced and I fully I fully believe it that will continue throughout the rest of this year.
Thanks, guys.
Yes.
From the line of Matt Taylor with UBI, Yes.
Thanks. This is actually a young from that I guess, maybe a question on May code is going back to the coming down the competitive account wins.
Are you going up again, some other robotic systems in the field more and more and winning directly or are those competitive account wins and accounts that don't currently have robotics yet.
Hi, This is a fresh and I'll take Alan just as we think about where we're going to me and the expansion of of May go and the opportunity to still exists given the penetration. That's currently air today I think we have opportunities all throughout so whether they're they're competitive accounts that are in or out. We're really is going to to all of those different accounting.
In trying to find areas pacemaker.
Okay, great are helpful.
And I guess another question just on the I'm sure. There you have visibility into surgical calendars and maybe the patients that's getting procedures I'm just trying to understand how much of the surgeries are working through the backlog versus the new patients.
And if you have visibility into that thanks.
Yes, I was what I would tell you as you think about the catch up there with clearly as we came into the recovery some level of patients that had previously deferred procedures that we're catching up behind this procedures done. We also know that's the backlog was was big in there. So our from patients that are out there that have some level of these I'd and.
Maybe they continue to defer some of those procedures per sunken submitted time and it's important though if you think about the products that we have and into these days that we serve those ne se don't really improve over time and so we believe that many of those patients will return to have those procedures done at some point in time, the other thing I would say as.
As in sand down it was happening we do know that surgeons were not only cleaning and clearing through the backlog, but they were also seeing new patients whether that was in office, sometimes there are through through telemedicine. So because of the thing he believes that the backlog remains strong into Q3.
And your next question is from the line of Richard Newitter from Silicone Valley Bank.
Hi, Thanks for taking the questions. So I just wanted to follow up on the the air they're trying to the is the added specifically as it relates to the robotics very very encouraged to hear that.
You are seeing increased demand for May go there and that growth some of the placements I guess.
I'm just curious we've heard in the past that robotics in India, sending might be a harder cell.
So it looks this year, what the where the value proposition is resonating the strongest and in particular one of the thing that we've heard some competitors youre offering robotic systems, and specifically, saying that they're better position potentially sell to the assay relates to the tiki scan and a lack lack of a need for CTG scan.
So you can just comment there.
And to wish that has been a barrier at all in the past and any comments that you can offer further on the out the receptivity in this care settings for robotics. Thanks.
Yes. Thanks, you know the surgeons that are operating there seems to want to have the best technology. They want to be able to do the same kind of procedures. They used to doing the hospital.
And I would say the city center, it's not going in on a barrier whatsoever.
Lease not recently I would say when maker was earlier on when we were initially launching our total knee, we had little flare ups here and there across the country about getting the city scan done, but if you want to do this most accurately in either very very accurate stand to be able to do the procedure the best way possible and right now I would say its.
Just a whimper of a sound, we really don't hear much of anything.
And frankly, there's a huge degree of interest for making any assay.
And that we saw that in the actual numbers in this quarter.
That's helpful and just on the topic of at these Kevin.
I appreciate the insight to the out stryker might be uniquely positioned to to serve that care setting with universe platform and you know in fact, the are effectively deep across a variety of service lines in the one stop shop for the need.
The surgeon on the pricing side, particularly implant pricing do you see the trend towards SCS eventually having an impact on pricing.
Is it going to get that worse ended implant pricing kind to set to go downward as as an increase ever procedures get performed there.
Well I can tell you right now we're not seeing you saw the price numbers that we posted and then I would say, we're not seeing much of a difference in pricing is see versus the hospital today.
A lot of thing really does I think it's going to depend on the ownership structure. The assay is it affiliated with the hospital.
Can't predict what's going to happen five years from now assay is run very very profitably.
Today or EBIT dollars are very healthy they're actually you know they are financially minded and they're good business people, but saw hospitals have in pushing us on price for years, and so will there be pressure from Nancy sure is it going to be unique and different I don't really see that at least we're not seeing any signs of that right now.
But we'll see how that evolves over time.
And your next question comes from line up Josh Jennings from Cowen.
Good afternoon, Thanks, Kevin and Glenn just one question for me I appreciate all the detail you provide in terms of the improvement.
No improvement in procedures I was hoping you can maybe lay out some trends intra quarter and maybe even into July on what you're seeing in terms of the demand for your capital. That's considered cobot essential within hospitals has done very well in Q2, how are you still seeing elevated demand or should we be thinking about that tapering off as.
Cobas getting under more under control.
Thanks for taking Josh.
Absolutely jokes aside from just set to think about how you're right I think with the Columbia to respond for some of that margin capital certainly saw the big uptick early in the quarter I, It's hard to say given given where we are in some of the continuation to flare ups and shipped around to of demand, what what's really pull forward versus what what's going to be the norm.
No.
I would say anything about that room still see a strong order book as we exited in our in our capital businesses and at the selling time, we've not seen any significant stockpiling of our capital equipment, either so I would say it's hard to tell you know where that had to be as we look forward, but certainly strong throughout the quarter second quarter.
Appreciate it thanks.
And your next question comes from the line of Kyle Rose with Canaccord.
Great. Thank you for taking the question just just one for me very encouraged to see the strength and maker in the quarter and I know it a lot's been asked here, but I wondered Kevin if you just give us more of a higher level perspective of the orthopedic robotics market at this point I mean are the customers you're seeing are they still there.
Early adopters looking to differentiate themselves in the market are these purchases more defensive because the hospital on the other side of town acquired one and then how do you view the size of the market just from a pure.
Units that can be placed in the field, particularly given the accelerated interest from not just the hospital side, but also the assay side.
Yes, so there that's a good to great question predicting S curve adoption rates are new technology, It's always a challenge right because it's not something we do everyday it's not like launching a new power tool or once again your camera, we can predict those curves pretty effectively.
I would tell you that theres critical mass is really starting to happen.
There's a momentum there so there's a belief that this is a future and so we're past the early adopter phase now we have hospitals buying their second third fourth fifth.
Maaco large systems and and we have competitive pressures of course that that occur relates to that but to the evidence and that the happy patients that are telling their stories insurgency in great results I think we still have a long way to go it's still very early.
In the cycle and we're pretty excited about it that the degree of interest even through a pandemic. So to be it'll have that type of interest means we really are getting to the point, where it's starting to become accepted it starting to people at seeing the benefits they wouldn't be buying the second or third or fourth.
If they really didnt see clear benefits to these to these procedures. So that gives us a lot of excitement about the future, but I would say we're still in the study early innings.
Given that there's you know the spot thousand hospitals out there and a large number them to orthopedic procedures, where we're still at a very very early early still the case.
And your last question comes from Ryan Zimmerman with BT I'd.
Thank you for Susan.
Kevin I think if I recall.
Neurovascular markets, a slowdown last quarter, which certainly a bit concerning clinically, but youre, taking his commentary today about neurovascular at more normalized levels.
As you could just elaborate on that dynamic you know relative to your expectations and and kind of is the market back to a level. You expect is there room for that to come back further and anything competitively that may have impacted during the quarter.
Just given the performance. Thank you.
Yes, Thanks, no it's not all the way back yet so the sort of the robust growth had to have the core but it made a big step forward as the quarter.
As we sort of move towards the end of the quarter.
And we were surprised that we really thought neurovascular was more like trauma core trauma.
That patients get get a skills are going to Russian or.
And they stayed away from hospitals or was it was a bit of a surprise, but that it went down and I don't think that was unique to us we didn't see anything materially different from a competitive landscape the impact to the business, we're really markets related.
And as the market improves we feel we're in we're going to be in very good position, especially with the new products are these newer larger more catheters that we launched there were just a limited launch and and even the surpass of all sort of hurting sense, we weren't able to get all the proctoring training that you have to do so that's been sort of a limited launch so if anything we have a bit of.
A new product a tailwind.
As we get out into the start save a lot of course or Q3 going into Q4, but it's not not much on the competitive front, it's really has been a market dynamic issue.
Where I guess hemorrhagic stroke some of that is its claws I.
All right, let's call it suddenly elective, which I would have never thought, but but those are coming back and I'd say I expect a that the market of neurovascular really improvement.
Okay. Thank you and then is really briefly for me.
How much it within make up the order book in terms of existing orders that are in process versus maybe the other side of the funnel I think investors. It had somewhat of a concern that well capital cycles are still robust they may not reflect.
That's a weakness they don't was likely to say, but no six from six months from now they can be a week as you know theres starts to be a gap and capital I'm. Just wonder if you can elaborate just on that strong order book that you you did call out today. Thank you.
Yeah, I think even in capital constrained times, there's certain capital people really want.
And they will find the money if it if it means that are not not spend money in other areas to be able to to buy the technology. They want to pull that off what we're seeing with Mako is this is technology they want.
And they're going to find a way to get it and if that means using flex financial great values flex financial if that means curbing certain capital expenditure to funnel it into into our business, that's what's going to happen.
When surgeons are demanding it and their surgeons that make a lot of money one of the silver linings of this this whole pandemic and of course on many has it but there are some.
One of the silver linings is understanding just how profitable our procedures are the hospitals.
Most hospitals no it but when you watch your bottom line sort of it operates because you're not doing these these high value procedures.
And we play in a lot of spaces with high value procedures, neurosurgery spine or joint replacement.
They really want to be able to get that going again and doing that with great technology is very profitable for the hospital and so I think theres been some recognition I got certainly heard that from certain hospitals about how important those procedures. Our site. So our belief is we have just outstanding technology.
That that improves outcomes and that that the surgeons want and at the surgeons really want it they're going to find a way to purchase it and so that may not apply to all of our capital, but it's certainly applies to to make them.
There are no further questions at this time I will now turn the conference over to Mr., Kevin logo for any closing remarks.
So thank you all for joining our call. We look forward to sharing our Q3 results with you in October.
Thank you.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
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