Q2 2021 Stryker Corp Earnings Call
Welcome to the second quarter 2021, Stryker earnings call. My name is me and I will be your operator for today's call.
At this time all participants are in a listen only mode.
Following day conference, we will conduct a question and answer session during.
During that time participants will have the opportunity to ask 1 question and 1 follow up question.
If you would like to ask a question. Please.
Paul Star then 1 on your Touchtone phone. This conference call is being recorded for replay purposes.
Before we begin I would like to remind you that the discussions during this conference call will include forward looking statements.
Factors that could cause actual.
Actual results to differ materially are discussed in the company's most recent filings with the S. E C.
Also the discussions will include certain non-GAAP financial measures.
Filiation stood the most directly comparable GAAP financial measures can be found in today's press.
Press release that is an extra bit to Strykers current report on form 8-K filed today with the S E C.
I will now turn the call over to Mr. Kevin Lobo, Chairman and Chief Executive Officer, You May proceed Sir.
Welcome to.
To Stryker second quarter, earning.
Pressroom joining.
Joining me today are Glenn mainline Stryker CFO.
Preston Wells, Vice President of Investor Relations for.
For today's call I'll provide opening comments, followed by Preston with an update on the Wright medical integration.
Glenn will then provide additional details.
Call regarding our quarterly results before opening the call to Q&A. Please.
Please note that our press release contains our results versus both 2020 and 2019.
For this call our commentary will be based on our performance versus 2019, which we believe.
<unk> provides a more relevant point of comparison.
For the quarter, we posted organic sales growth of 9.3%, reflecting growth versus 2019 for all our major businesses.
This strong result was driven by standout performances from Neurovascular Mako.
Emergency care sports Medicine, and our U S shoulder and total ankle products.
Each of these posted very strong double digit growth.
International organic growth outpaced the U S at 14, 2%.
Despite COVID-19 challenges in some countries.
We posted double digit growth.
Most regions, including excellent results and South Pacific, China, Canada, South Korea, and many countries in Western Europe.
We were also pleased to see the continued rebound in elective procedures as both hips and knees saw quarter over quarter sequential improve.
And both returned to growth.
Also now that we have a fuller appreciation of Wright medical we are delighted to have it within the Stryker family.
With our first half organic growth of 7.1% combined with continued recovery of electric procedures, a strong order book across.
Movement capital businesses, and new product innovations, we have increased confidence in the full year outlook.
This is reflected in our upward narrowing of organic sales guidance to 9% to 10% compared to 2019.
Our sales performance carried through the rest of our results with strong.
Ross our margin performance and adjusted EPS growth.
And cash flow conversion of over 100% in the quarter.
Through the remainder of the year, we do expect a disciplined increase in spending to support our future growth expectations.
Our bullish sales outlook combined with ongoing execution on margins.
And continued progress on rate medical integration as resulted in our raised full year adjusted earnings per share guidance of $9.25 to $9.40 a share.
I continue to be impressed with the resiliency of our people and culture.
Which positions us well for a successful 2000.
<unk>, 1 <unk> and beyond I.
I will now turn the call over to Preston.
Thanks, Kevin My.
My comments today will focus on our second quarter performance of our combined trauma and extremities business, including an update on the ongoing integration of Wright medical.
During the quarter, our combined worldwide trauma.
<unk>, 20th remedies business, including Wright medical had a strong performance growing 7% compared to 2019.
The performance in the quarter was driven by double digit growth in our U S trauma and upper extremities businesses.
The U S businesses were benefited by the recovery from Covid related restrictions, which continues to.
Outpaced the rest of the world as well as the ongoing execution of the U S selling integration.
The trauma business unit was positively impacted by the reopening of economies and the continued strong performance of key products, including <unk>, 2 alpha and the mini frag plating system.
Our U S upper extremities business, which remains.
And number 1 in shoulder arthroplasty grew strong double digits in the quarter behind continued strength within reverse arthroplasty portfolio with perform reverse and revision dragging the growth.
The upper extremities performance in the quarter was enhanced by the continued adoption of our blueprint.
Blueprint planning software with.
<unk>, 50% of total shoulder cases completed using blueprint.
As a result of the strong performance of our trauma and extremities business, which grew approximately 5% in the first half of the year. We are confident in the combined business to grow at least 6% for the full year when compared to 2019.
We are now about 9 months into the integration.
<unk> of Wright medical and we remain very pleased with the progress and efficiency at which the team is moving through the integration.
The U S integration is pacing ahead of our expectations and cross selling has begun in a limited capacity.
We expect to continue to execute on our cross selling priorities during the second half of the year as we work to fortify.
Supply chain and processes to support cross selling activities.
Outside the U S. The teams have successfully executed integration plans in several key markets, including the U K, Germany, France, Japan, and China with further countries to follow into 2022.
In addition to the commercial activities.
We are also executing on the integration of other operational areas, including the consolidation of distribution and sales offices harmonization of key operational processes and executing on our manufacturing site strategy.
Within R&D. The team also continues to make progress on aligning the long term portfolio pipeline strategy.
<unk> and harmonize design processes.
While the team has moved through the integration. They have also remained focused on executing our critical existing projects in the pipeline. This includes the recent launch of the new tortilla perform humeral system.
Each offers clinical solutions for the simplest and most complex arthroplasty procedures and delivers on our Mrs.
To make health care better resurgence in the patient's day serve with that I will now turn the call over to Glenn.
Thanks, Preston today, I will focus my comments on our second quarter financial results and the related drivers our detailed financial results have been provided in today's press release.
As a reminder, we are providing our comments and compare.
Mission from to 2019 and is it is a more normal baseline given the variability throughout 2020.
Our organic sales growth was $9.3 in the quarter. The second quarter included the same number of selling days as Q2, 2019 and Q2.2020.
Compared to 2019 pricing in the quarter was unfavorable.
Paris <unk>, 6%.
<unk> Q2, 2020 pricing was.
5% unfavorable.
Foreign currency had a favorable 1.5% impact on sales during the quarter, we saw a recovery ramp of elective procedures and accelerated sales momentum as the impact of the COVID-19 pandemic.
As eased in most geographies.
However, the recovery ramp of elective procedures continues to be variable by region, and geography and has a more pronounced impact on our orthopedic and spine implant businesses.
For the quarter U S organic sales increased by 7.5% reflecting.
The recovery of our procedural business and continued strong demand for Mako medical products in neurovascular products.
During the quarter, we had strong sequential improvement in all our U S businesses International organic sales showed strong growth of 14, 2%.
Our adjusted quarterly EPS of 2.
5 increased 13, 6% from 2019, reflecting sales growth and operating margin expansion, partially offset by higher interest charges, resulting from the Wright medical acquisition, and a somewhat higher quarterly effective tax rate or.
Our second quarter EPS was positively impacted from foreign currency by force.
<unk>.
Now I will provide some highlights around our segment performance.
<unk> had constant currency sales growth of 26% and an organic sales growth of 6.7%, including an organic growth of 8% in the U S.
This reflects a ramp up in elective procedures, especially.
In knees and trauma and extremities, our knees business grew 7.5% in the U S. Reflecting the strong bounce back as the Covid related restrictions were lifted.
Other orthopedics grew 26, 5% in the U S, primarily reflecting strong demand for our Mako robotic platform, partially offset by declines.
<unk> and bone cement.
Internationally orthopedics grew 4% organically, which reflects sequential improvement as the COVID-19 impacts have started to ease in Europe.
<unk> momentum and Mako internationally and strong performances in Australia.
For the quarter, our trauma and extremities business, which includes.
Total delivered 7% growth on a comparable basis in.
In the U S comparable growth was 12, 5%, which included double digit growth in our upper extremities and trauma businesses.
In the quarter Med surge had constant currency and organic sales growth of 8.3% which included 6.
<unk>, 4% growth in the U S.
Instruments had U S organic sales growth of 9% primarily related to growth and smoke evacuation lighted instruments and skin closure products, partially offset by slower growth in power tools as a reminder, during the second quarter of 2019.
19 instruments had a very strong growth of approximately 19%.
Endoscopy had U S organic sales growth of 6%, reflecting strong performances in our sports Medicine General surgery and video products.
The medical Division had U S organic growth of 13, 4% reflecting continued.
Double digit performance in our emergency care business.
Internationally med surge had organic sales growth of 15, 9%, reflecting strong growth in the endoscopy instruments and medical businesses across Europe, Canada and Australia.
Neurotechnology and spine had organic growth of 15.
115, 5%.
This growth reflects double digit performances in all 4 of our neuro Tech businesses, CMS Neurovascular neurosurgical and E&P.
It also reflects very strong growth in our neurovascular business of approximately 30%.
In our U S.
<unk> and Aerotech business posted an organic growth of 17, 3% highlighted by strong product growth in <unk> IQ bipolar <unk> Mac space Cryotherapy and nasal implants.
Additionally, our U S neurovascular business had significant growth in all categories of our products, including <unk> flow.
Diversion in ischemic.
Internationally, Neurotechnology and spine had organic growth of 28, 8%. This performance was driven by strong demand in China, and other emerging markets as well as Europe and Australia.
Now I will focus on operating highlights in the second quarter our adjusted.
The gross margin of 66% was favorably favorable approximately 15 basis points from second quarter 2019, compared to the second quarter. In 2019 gross margin was primarily impacted by business mix and acquisitions, primarily offset by price.
Adjusted R&D spending.
2.6% of sales, reflecting our continued focus on innovation. Our adjusted SG&A was 33, 4% of sales, which was slightly better than the second quarter of 2019. This reflects our continued cost discipline and fixed cost leverage offset by the impact of the Wright medical acquisition in.
In summary for there.
Quarter, our adjusted Operation operating margin was 25, 9% of sales, which is 5 basis points improvement over the second quarter of 2019.
This performance primarily resulted from our positive sales momentum combined with the disciplined ramp up in costs offset by the dilutive impact of acquisitions.
Based on.
With secretive momentum, we continue to reiterate our op margin guidance for the year of 30 to 50 basis points improvement over 2019, excluding the impact of Wright medical.
Related to other income and expense as compared to the second quarter. In 2019, we saw a decline in investment income earned on deposits and an increase.
<unk> and interest expense, resulting from the additional debt outstanding for the funding of the Wright medical acquisition.
Our second quarter had an adjusted effective tax rate of 17% and was impacted by our mix of U S. Non U S income and some adverse discreet tax items included in our provision to return adjustments our.
Our path to date effective tax rate is 15, 2% for the full year, we expect an adjusted effective tax rate of 15% to 15, 5% with some variability in the remaining quarters, including a slightly lower rate in the third quarter in a more normalized rate in the fourth quarter.
Our year focusing on the balance sheet. We ended the first quarter with $2.3 billion of cash and marketable securities and total debt of $12.7 billion <unk>.
During the quarter, we fully repaid the $400 million of term loan debt related to the borrowings incurred for the acquisition of Wright medical.
Year to date, we have paid down 1.15.
Then of debt.
Turning to cash flow our year to date cash from operations was approximately $1.3 billion. This.
This performance reflects the results of earnings and continued focus on working capital management.
And now I will provide a summary of our revised guidance.
Based on our performance in sales Ram and the.
Second quarter as well as our capital orders pipeline, we expect 2021 organic net sales growth to be in the range of 9% to 10%.
As it relates to sales expectations for Wright medical we now expect comparable growth for trauma <unk> extremities to be at least 6% for the full year when compared to.
I've been buying results for 2019.
If foreign currency exchange rates hold near current levels, we expect net sales in the full year will be positively impacted by approximately 1%.
Consistent with the upper range of our previous guidance net earnings per diluted share will be positively impacted by foreign exchange.
By approximately 10.
In the full year and this is included in our revised guidance range.
Based on our performance in the first 6 months and including consideration of our improved full year Wright medical performance impact controlled spend ramp to facilitate growth and continued positive recovery outlook.
We now expand expect adjusted net earnings per diluted share to be in the range of 925 to 940 and now we will open up the call up for Q&A.
Thank you we will now begin the question and answer session. If you have a question. Please press.
Star 1 on your telephone keypad, if you would if you wish to remove from the queue. Please press the pound or hash key.
A reminder, callers will be limited to 1 question and 1 follow up question.
Your first question comes from the line of Bob Hopkins of Bank of America. Your line is open.
Sure.
Well, thanks, and good afternoon and.
Congrats on such strong performance across the entire business.
It can be done essentially every metric so I just I just have 2.
2 questions and I'll say them upfront in the interest of time. The first question. Kevin is for you I'm just wondering how you'd kind of frame your thoughts on the outlook for your hip and knee business in the back half.
The rise in Covid cases that we're seeing that that's question number 1 and then would love you to comment also is question number 2 on the acceleration.
Neurovascular, maybe just give a little more color I mean was that market share. You think was that was the strength in ischemic and hemorrhagic.
Just kind of looking for a little more color on the acceleration there. Thank you.
Sure. Thank you Bob first on the on the hip and knee what we're seeing is really a gradual increase we've seen it throughout.
Jim here.
A return of elective procedures. These are deferrable procedures that need to be done at some point and yes with the delta very interest starting to see pockets of disruption, but overall the hospitals are very capable of being able to deal with this and we're seeing in markets like Latin America and other markets. The situation is actually improving so overall.
We know theres going to be some disruption that is baked into our guidance, but we believe with the momentum that we have across not only our implant business, but as well as our capital businesses and we feel pretty confident enough to raise the bottom end of our full year sales guidance as it relates to neurovascular, if you look at that.
<unk>, we had an outstanding first quarter was around 27%. So this is 30% so it's not really a huge acceleration.
I would say, we really have a great product cycle going on right now across Florida, hurting stents as Shimon stroke, our hemorrhagic coils are aspiration catheters. So we really have the basis covered and.
That business fantastic growth really globally, including terrific performances in Asia Pacific. So we I do expect that we'll continue to have very strong performance throughout the rest of this year.
Great. Thank you.
Your next question comes from the line of Robbie Marcus of Jpmorgan.
We're having your line is open.
And I'll also add my congrats on a really impressive quarter here.
<unk>.
Maybe 2 questions from me.
Wanted to start off we saw nice performance down the med search business and throughout medical.
Yes.
Your line, there's a lot of new product launches going on here. So I'd just love to get a sense of what the key drivers are how the <unk> launch is going and what you're seeing in terms of the capital equipment health of the market out there.
Hey, Ravi it's Preston just in terms of capital overall, and we continue to.
To see a pretty stable capital environment, I think we've seen that really through the first couple of quarters and really evidenced by the continued strong sales in medical as you said and then also.
Of course, with our Mako technology.
As it pertains specifically to medical so obviously, we have the security bandwidth I'll talk about in just a second but we also have really strong performance.
Sales out of our emergency care business and we've seen that in the last couple of quarters as well and so that continues to be very strong and there's just been an uptick there really in the U S and outside the U S. With regards to procure 80 itself. The team is very pleased with how that launch has gone and started.
We've really gotten.
Formative of of awareness out there, we certainly have a lot of engagement from our customers and we're starting to see a building momentum in orders and sales in the U S. And then starting to kick off that launch outside the U S. As well. So we really expect that procured he is going to continue to be a driver for medical really for the remainder.
This year and as we go into now.
Great and.
Maybe for Glenn or Kevin whoever wants to take it.
I know you guys don't guide quarterly, but 1 other concerns we've heard from investors over the quarter is.
Now that we're still in an environment without normal seasonality.
A lot of concerns around maybe excessive weakness in third quarter from from people coming out of Lockdowns vacations with doctors et cetera. So I was wondering how you're thinking about the progression from second to third third to fourth quarter and if we're already back to normal seasonality.
Or when we might be able to expect that thanks.
Yes. Thanks for the question, Rob as you know Q3 tends to be seasonally our softest quarter, but I would assume that this year's seasonality will be very similar to what <unk> seen in prior years and the talk about vacation I've heard some of those comments I really think that's noise.
And that really that could delay maybe a procedure from 1 month to another month, but likely within the same quarter. So I expect normal seasonality as you have seen in prior years.
Great I appreciate it Kevin Thank you.
Your next question.
Question comes from the line of Chris Pasquale with Guggenheim. Your line is open.
Thanks for taking the questions.
Any update on rate was encouraging certainly it sounds like the upper extremities piece continues to do very well can you talk a little bit about what youre seeing in lower extremities that was probably the more challenging piece to integrate curious how that business.
It's versus 2019.
Yeah. Thank you Robby.
So first of all I'm sorry, Chris. Thank you, Chris first of all I would say that the total ankle business did very well in the second quarter as you know the the rest of foot and ankle is much more discretionary.
The podiatric volumes are coming back so it was certainly.
A better quarter in Q2 than Q1, but it is lagging a little bit just like we're seeing with our spine and <unk> and with hips and knees. It is a bit more elective those foot and ankle procedures, but I'm very pleased with the stability of our sales force the leadership that we've put in place.
And as elective procedures comes back we do expect that will continue to.
Grow it was as a market improvement, we're not seeing the kind of disruption. We saw early on with K to earn through that integration. So I'm very bullish on rate overall and as I mentioned in my opening remarks.
Delighted to have this company within our portfolio I think I have a deeper appreciation we knew it was a good company when we acquired it.
And frankly, I think it's even better than we thought.
That's helpful. And then the color on Mako continues to sound very bullish with the other ortho business, probably didn't improve sequentially as much as the other pieces of the business can you help us sort of size the bone cement headwind, there and maybe give us a sense for.
What the Mako capital contribution.
<unk> looked like.
Yes.
You mentioned Mako continues to be continues to be very strong and so that was 1 of the businesses for sure over the last last 12 months really we've seen continued strength. So that's why you won't see necessarily that same sequential improvement that we're seeing on some of the other businesses.
As you know with regards to bone cement of course that that's an area that has been declining was certainly impacted by the by the pandemic and so it will be a detractor as we think about that overall category. We don't we don't really provide a breakout of those but just thinking about in terms of mako continuing to grow and offset by some declines from.
Standpoint.
Thanks.
Okay.
Your next question comes from the line of Anthony Petrone of Jefferies. Your line is open.
Thanks Al.
John.
Also add another great congratulation.
I'm now on a great quarter. The first 1 for me would be on deferred backlog procedures. Some of your competitors has recently using that even as this quarter are sort of putting numbers against that and I'm sure.
I'm wondering if there's number internally at Stryker that you could share on specific to the hip and knee business what amount of.
Deferred backlog is still out there and how long do you think that'll be a driver for the business and the second 1 I'll put up there is wealth on right.
You mentioned, Kevin second half.
Cross synergy selling potential into the second half and we would assume that extends into next year, just sort of trying to quantify that.
That is is that a couple of hundred basis points in and is that net of dis synergies. Thanks again.
Yes, so first with regards to your question on the deferred backlog, we don't have a specific number I mean theres a lot of variables that are going into trying to figure out what that is what we do.
No. It certainly over the last year that we haven't had the same level of procedures that we would've expected to you as a result of the pandemic and so super hard to predict exactly which percentages of patients that are back or from that deferred backlog or that are new patients, but we do know is that surgeons are continued.
Continuing to try to work through as many patients as possible finding different opportunities to add capacity into the scheduling or into their opportunity to perform those procedures and so we don't expect that we're going to see any sort of outsized growth figures that happened in any 1 particular quarter or month, but that's something that we would expect that we're.
Going to be working through this backlog over the next several quarters. So we expect it to be a tailwind for us really over the next several quarters and into into 2022 for sure.
Would you think about as you're thinking about your other question with regards to write medical cross selling component is something that as I mentioned is is we're pleased with the start of that it's early.
Process, we're expecting that as you mentioned to continue for the rest of this year and into next year. We haven't provided a specific size of that opportunity, but its baked within the overall guidance that we've provided for the overall combined trauma and extremities business, which as I mentioned, we expect to grow at least 6% compared to 2019.
That also does include the dis synergy component as well.
Okay. Thanks.
Your next question comes from the line of Vijay Kumar of Evercore ISI. Your line is open.
Thanks for taking my question.
<unk> 2 from my side Ken.
Kevin maybe on Mako.
Is there are pieces to be made of brown.
Non robotic systems as haven't changed has it environment of Brown.
Utilization and how the systems are being used post pandemic has that changed at all and have you seen in.
<unk> utilization.
Thanks P. J no we have not seen really any change in utilization post pandemic.
The gating factor really is being able to do the procedures.
And having the flow of the patients related to just the overall hospital operations, but so far we haven't seen any change we are seeing.
Increase a lot more demand for Mako in the ambulatory surgery centers as you know a lot of volume is starting to shift towards surgery centers and for US it's been a.
A real tailwind or ASC offense is ex is performing extremely.
Streamline well.
And so there are a larger percentage of our makers that are going into surgery centers, but that's been the only dynamic we've seen change.
No real change to the procedure utilization.
That's helpful, Kevin and maybe 1 for Glenn.
Glenn on gross margins here I know you have price here in Tokyo.
But even adjusted for mix here I mean, it looks like your gross margins have held up much better.
Since your peers, who have been calling out.
Shipping cost manufacturing variances.
And it's also kind of reflected in the guidance here margins for back half.
We're off the annual operating margins were above our 2019 levels, which doesn't seem to be the case with your peers is there anything that's different about stryker.
Hum.
This management P&L day era, I'm curious in what's driving that.
Better margin performance versus your peers.
Yes, I can't I can't necessarily speak to our peers per se, but I will say.
Your question is maybe a music to the years of our <unk> group.
And they have put a lot of focus and driving improved margins and also driving really good fixed cost leverage and we will start to see that show up in our gross margins.
We're still not guiding on gross margin, so I will say.
We'll see that benefit, but we will also see the benefit of mix come.
Some through which right now you know Wright medical is a little bit of that influence that we're seeing on the margins.
Offsetting those though will be will be price.
Which typically is going to be the biggest thing we will still see that in the -1% range for the full year.
And we fully expect that that pricing in.
Pact will.
The roughly offset by a lot of that positivity that we are seeing and also the mix factor related to Wright medical.
Yes, I'd just like to add 1 comment I'd just like to add 1 comment so as you probably are hearing.
Across not just the med tech industry, but broadly there is pressure on raw material.
Input costs.
And I'm delighted with the way that our organization has been able to offset those with a lot of other savings initiatives efficiency initiatives.
And purchasing initiatives, which has been kind of in the works for the last couple of years, but we've really built tremendous capabilities now something I haven't been able to speak.
About frankly in prior years, but we really have the organization humming right now and so we are able to offset some of the challenges that others are experiencing and we're also experiencing with electronics and some certain components.
And I feel really really good about our supply chain resiliency.
No that's clearly showing up in the numbers here Kevin.
Kevin versus your peers, thanks, guys congrats.
Thank you.
Your next question comes from the line of Matt <unk> of Credit Suisse. Your line is open.
Great. Thanks, so much.
So 1 follow up on.
Our robots and I just had 1 question on just the sort of trends in mix that you're seeing in U S knees in particular.
Nico.
Obviously, congrats on all the great results and momentum.
Up sequentially off a very strong Q1.
But.
But I was wondering if you could talk a little bit of maybe about the color on any change in mix.
From a placements.
<unk> sales are.
Or in particular, if you're starting to see any sort of cross effects between upper extremities and the robot is these 2 business lines kind of move.
Move towards.
Convergence in that in that new application whenever that comes 12.24 months from now and I have 1 quick follow up.
Hey, Matt as President John just in.
In terms of robots and in mix I mean, 1 other things that we identified approximately a year ago was that we were starting to see a bit of a trend.
Financing, we haven't seen any significant changes in that approach or an in that mix.
For the last year, so no big changes from a mix standpoint, as we think about Mako and how we're selling may go in the market with regards to to convergence.
Again.
We're still not seeing anything there we've talked a lot about.
Our excitement of the potential with with Mako in shoulder, but no nothing new to report in that area at this point.
Okay.
Then just on the knee business 1 of the things 1 of your competitors talked about was sort of a heavier mix.
Towards the primaries versus.
Versus revisions I guess, given that revisions were a bit more of an acute emergent. They are more emergent procedures sell more of those during the during the pandemic, maybe then primaries in some areas.
Im wondering if youre seeing something like that or any demographic mix shift.
Just because of what we've what we've been through and the types of patients maybe they were getting knees. It 6 to 9 months ago versus versus those that are coming through now any color would be would be great.
Yes, Matt nothing nothing specific to report in that in that area. I mean, the 1 thing that we have seen throughout the pandemic is variability and so certainly.
By geography by area Youre getting a lot of variability. So again nothing that I would I would specifically point you to in terms of our mix.
Great. Thanks, so much.
Your next question comes from the line of Joe <unk> of Citi. Your line is open.
Good afternoon, and thank you for taking the question.
Have to really.
We've talked for years about from movement towards the ASC.
Are you seeing that accelerate or are the same or is there any color that you can put around that.
Yeah, Julien I mean, we've talked about this before we certainly.
The pandemic day create an acceleration of a trend that was already starting with regards to the shift to the ASC and we would expect that to continue we feel very strong about our offense and very good about our offense that we have with regard to the ASC and really being able to bring and leverage the full power of our product portfolio in that.
Setting so we're very comfortable with that shift in and certainly believe that we have the products to satisfy that shift and really be able to take advantage of that trend.
But when you say you have a product for that ship is not just a robot, but it's I would assume that you're building out the whole AFDC is that the right way to think about it.
Yes Joanne.
Joanne the right way to think about it is we have virtually everything they need for an orthopedic surgery center from building out the suites with the booms and lights in the room design to the operating table to the beds and stretchers that are required to the power tools and the flight helmets that they were all the implants.
From foot and ankle procedures, all the way to shoulder, including hips and knees sports medicine procedures, just think about our portfolio with it absolutely covers the gamut of what they need.
In those surgery centers, so that that really makes life easy for an operator for an ASC to be able to contract with 1 company to cover such a huge portion.
Of the procedures that are being done so our portfolio really lines up beautifully for that we also you may have read recently that we have this deal with conformance that we worked on a couple of years ago. We have started and launched our first few cases of a very very simplified streamlined offering that provides less sterilization.
We call it kind of a knee in a box the official name of it as triathlon as 1.
With personalized cutting guides for the procedure and so that was designed specifically for the ASC and that's now launched but frankly, a few years ago, we didn't realize that Mako would be this popular in the surgery center as.
It's proving to be so we now have both said that we can offer.
Some surgery centers won't won't have a robot but.
It involves a huge portion of our portfolio across some of our med search products as well as our implant businesses.
That's helpful. Thank you and then my second question has to do with M&A.
In October year rounding.
In the 2 year Mark on the announcement of Wright medical.
Does that change your thinking and timing our kantar.
Yes, Joanne you're right. It is rounding the 2 year Mark on Wright medical.
However, we're only 9 months into sort of the cash flow impact of buying bright medical and so.
As we announced at the time of the acquisition, we were going to focus on debt reduction and sort of tuck in kind of M&A and so that really is what we've been doing and you've seen it over the last 9 months, we've paid down just a little over $1 billion of debt. This year, we will continue to look for opportunities to do.
That as we move forward, but we're ahead of the schedule that we thought we'd be on for debt pay down. So that's good and then honestly our BD teams are working and looking at smaller tuck in M&A deals, which we think actually provide the most sort of shorter term growth upside and so we're excited as they bring.
Bring us new deals to look at sort of in that kind of size and category.
Thank you.
Your next question comes from the line of Larry <unk> of Wells Fargo. Your line is open.
Good afternoon, thanks for taking the question.
2 robotic questions from me first on Mako I'd love to hear about the O U S rollout.
New geographies, how that's going places like Japan.
Japan, I think youre waiting for China, hopefully I don't have those 2 backwards just color on the mix you know U S O U S.
<unk> placements and I had 1.
Follow up.
Yes, Thanks, Larry.
O U S business has picked up as you saw in the pandemic. The U S business continued very strong on Mako, but our O U S business did slow down that's that's ramping back up again, we are fully operational with both Japan and China on all 3 applications.
<unk> same with Brazil, as well as our Russia, and so Japan is really starting to accelerate which we're quite excited about.
China has started we still have a little bit behind Japan, Brazil, We now have our first few sales in Brazil. So that's probably 1 of the later ones.
And Russia as well so we are in the early stages and in those.
For markets.
The demand is very high from surgeons, which is exciting Brazil was a delayed a little bit by COVID-19, but we are we are starting to build momentum there as well so it's very exciting.
The surgeons, it's kind of taking us back to when we launched Mako total knee here in the United States. There is high demand for it and you should expect.
Expect strong performances in the quarters ahead.
That's helpful and from my related robotic question. Kevin you guys have started talking more publicly about that.
<unk>, having people at Stryker evaluating surgical robotics. So my question is how important is it for stryker to participate in this market at some point.
Point.
And how do you want investors to think about.
The kind of investment that it might take to be competitive in that market. Thanks for taking my question.
Okay. Thanks, sorry, I assume by that question Youre talking about general surgery robotics, yes, sorry about that.
Yes, no problem just wanted to make sure that was clear.
I would say, there's really no need for us to be in general surgery robotics as you can see we're running a very good business at Stryker.
Is a big market that has big growth potential, but it's something that like other adjacencies that are attractive to us be it areas I've spoken about in the past like neuromodulation or peripheral vascular this isn't.
And it's an attractive adjacency.
The pathway forward is not obvious and not clear at this time, but something we will continue to look at but that's not something we have to be in.
But if the right opportunity presents itself and we think we can build a strong business.
We will certainly make a move but.
Not obvious at this point.
Thank you.
Your next question comes from the line of Spiro <unk> of Deutsche Bank. Your line is open.
Hi, Good afternoon, guys and thanks for taking my questions. The first 1 as it has.
If you look at the guidance that you provided can you give us color on where gross margins.
And SG&A should be exiting the year is to compare it versus the fourth quarter 2019.
Yeah.
Sure.
Speak specifically the guidance on gross margin or necessarily SG&A I guess, what I can tell you is that.
As we look at gross margin.
We probably would plan on more orthopedic business may be impacting that gross margin.
But that.
That will be dependent on.
Continued ramp in those businesses on SG&A, we arent fully ramped in terms of what I would call a normalized spend and so.
As we look.
To continue sort of fueling the growth as we ramp back up.
We'll probably see increases in SG&A over the course of this year.
Okay, Great and then.
We're talking to a lot of hospital systems for during during the quarter or are they talked about.
Pretty significant move of orthopedics from inpatient to outpatient, but not necessarily into the ASC the jobs that get a lot of investor attention as procedures moved into the outpatient department of hospitals does it impact our surgeon selections of products at all or is it no impact from the move.
Yeah no.
I think any impact on implant choice, if they're moving to the hospital outpatient or even frankly to the surgery center. Thus far we're seeing surgeons continue to operate with the same implants, so regardless of which facility they are operating in.
Great. Thanks, so much.
Your.
Question comes from the line of Kyle a crew of.
Jewish Securities Your line is open.
Great. Thanks for taking our questions just for Wright Medical you know, you're saying you're confident that the combined business will grow at least 6%. This year can you just speak to any more detail around sort of the recent.
Next question. This business are you guys seeing any benefit from dislocation associated with the recent and pack or a spin off and then I guess is there any reason why that 6% couldn't be a 8% to 10% growth next year.
Yes, Thanks, Kayla, what I'd tell you is we're really excited about the upper extremities business.
Driver it was growing very very fast before the acquisition, that's continuing to to really sing, especially in the United States.
And we've just launched a new product, which will provide extra fuel to the fire and then on the lower extremity side, we knew that the foot and ankle is gonna be a tougher integration, but it's going well, they're a little bit more elective.
<unk> procedures, but the total ankle is doing extremely well. So overall the product portfolio is performing well our sales forces are integrating well the U S. Integration is ahead of schedule.
U S is going to take a little longer and we knew that these countries take a little longer with a distributor arrangements that we have in place before they fully hit their stride, but.
2 of those if you recall when we started the year, we said low to mid single digit growth on a combined basis, and we sort of moved it up to mid single and now we're kind of thinking it's really going to be 6 plus percent for this year.
And you should assume if this continues and the elective procedures on the lower extremities ramps up that we should have a very good year next year and it.
Our core trauma business is actually having a very good year as well.
So overall feeling very good about it we're not going to give guidance to next year, but.
I think you can tell by our tone that we're feeling very optimistic about the future of our trauma and extremities business.
Great. Thanks, Thanks, Kevin and then.
Just on the spine market can you just.
Also our hair, a contrast are at and what you've seen in terms of how the recovery is progressing this category I mean, you know maybe compared with with some of the other areas of orthopedics. Thank you.
Yeah, Kevin just just as we think about spine and comparison to other ortho areas. We havent seen a significant difference in that recovery I think I've mentioned before.
Variability really being the key word and so again, it's just been different pockets of disruption and opportunity as well and so nothing significant that I would say that we've seen in terms of the recovery for spine thats been different than what we've seen in our other other elective areas.
Great. Thanks.
Sure.
Your next question comes from the line of Steven Lichtman of Oppenheimer <unk> Company. Your line is open.
Thank you hi, guys.
I was wondering first.
Can you talk about your spine business.
How you are feeling about this.
That business.
What's your outlook for underlying growth and what are your latest thoughts from timing on robotics.
Spine.
Yes, so in terms of underlying growth I mean, we don't we don't break out guidance in terms of as we think about spine, but we do expect that market.
David in that business to continue to accelerate.
As the recovery happens in the back half of the year with regards to robotics I mean, we've talked about this before is our key areas of focus for robotics and applications that are next spine is 1 of those and so we continue to move down that path with a couple of different options looking at.
Market Mako, but also through our <unk> acquisition and the Cardin robots some opportunities there we don't have a timeline that debt. We are sharing at this point and so it's something that we'll continue to update you on is as we make progress in that area.
Thanks, Preston and then secondly, with ortho centering the bold here.
I think about 6 months any updated thoughts on a smart implants coming from that acquisition.
No nothing nothing new to report at this point I mean, obviously, it's still fairly new in terms of the acquisition into the organization. We still do believe in smart implants in smart devices and that they will have a role to play in orthopedic.
And so as we are same similar as with robotics as we as we get further down that pathway. It's something that we will certainly keep you updated on.
Got it thanks guys.
Your next question comes from the line of Mike Matson of Needham Your line is open.
Yes, thanks for taking the questions. This is David on for Mike.
The first 1 just on the ASC just given the different dynamic.
There maybe there is more critical windshield time does does that ASC market need a separate sales force and strategy or do you think you can leverage that.
Current sales.
Sales network.
Yes, we have a very custom designed approach to selling to the ASC is it's not something where to elaborate on on this call, but I would say it has required a different approach and we're really excited about the way our offense is working from the market.
Okay great.
And then.
I guess on Mako.
J&J you talked about the <unk> launch in the U S.
So just expectations over the next call. It 12 to 18 months and thanks for taking my questions.
Yeah, well expectations for Us I would say, we expect <unk> to continue to do very very.
Well as you've seen with other competitive entrants into the market and only validates that robotics is here to stay and orthopedics.
And so we like our chances we know we have an outstanding solution that delivers great results, which is why hospitals are buying their second and third and fourth makos and so we welcome the comparison it's early.
To them and we just like the fact that robotics is going to continue to grow within orthopedics.
Great. Thank you.
Your next.
Question comes from the line of JV Steve.
Barclays. Your line is open.
Everybody. Thanks for the question.
I realize.
Early days from a small part of your business, but just curious what youre seeing on the ground there with the China tenders and the volume based procurement there and I think that was supposed to happen. Some point here in the next few months and you know if there was an update on that front.
Hey, Travis Thanks for the question in terms of the VP in China. It is something that's ongoing we don't have any major.
China pace at this point as we're waiting on feedback on the process I think 1 thing to note and you mentioned that it certainly China is a smaller part of our business and then as we focus on the products that are actually potentially under the tenders isn't even smaller component of our business. So just something to keep in mind as we think about the overall impact that could be coming from.
<unk> on our business. So we expect to hear back something later in the third quarter and at that point in time, we'll take a look at it. The 1 thing that we know is just based on the timing. We don't expect it to have any significant impact on our 2021 numbers and so we will continue to monitor and it'll be something that we will contemplate as we as we go into 2022 alright. That's helpful. Thank.
<unk> and just wanted to get an update on the sports medicine business, specifically I know you had been growing double digits. Just curious if there's any additional color. You can you can add there both in the U S and O U S.
Yeah, So certainly O U S. It's a much smaller business I would say within the U S. The tailwind of the shift to the ASC and our ASC.
Offense is in addition to great cadence of new products is really fueled a very strong growth and we had a 20% growth in the first quarter in the U S and our sports medicine business.
Great. Thank you.
Your next question comes from the line of Matthew O'brien of Piper Sandler Your line.
Your line.
Great. Thanks, so much for taking my questions.
Kevin you mentioned that at least 6% growth in trauma and extremities is that the growth of the overall market because I know the E. Part of that is growing faster than the key part is that the overall growth in that.
But overall category combined and then.
So as you think about going forward typically that 9 to 18 month period is when you start to see the most dislocation from a product perspective is trauma and extremities different than what we see across traditional orthopedic.
Acquisitions, just because there are fewer places for some of these reps to go so maybe the dislocation that you see.
B little a little less from than we typically see.
Yes, I think the way things are playing out right now the dislocation is less in spine certainly.
That's been our experience that's been a pleasant surprise, so far, especially on the foot and ankle side, where we had anticipated a bit more dislocation and frankly, we have terrific.
A kid products and we've provided really quick stability for our sales people to know where their bosses to know what their territory is and so we moved with more speed. This time learned some lessons from from par prior integrations.
I would tell you that we think we're growing at least at the market if not above the market because you have to remember that at least 6% is for.
The full year, including a pretty depressed first quarter right. So the first quarter of this year was not kind of a normal year as it relates to the extremities business at all so to have that over the full year at least 6% on a combined basis I think that's probably growing above the market and we will see as the year progresses, feeling very good about.
Our core trauma business and our extremities business.
Got it thanks for that and then over to Neurovascular I know you don't want to call out this acceleration here in Q2 versus Q1.
Good day and much better than the overall market.
By our calculations anyway so.
Our specific areas that are accelerating.
While he mix, specifically within that category and that you're really well positioned there.
And then just is your ability to bundle is much better than elsewhere and I guess the real question is can this Kevin this business grow upper teens low twenties for the next couple of years.
Well, it's been growing at that kind of rate.
Now for the last few years in dispute. This year you are seeing an acceleration of growth in what I would attribute it to as we already have fabulous coils.
Stent Retrievers, we're already very very good, but we've strengthened our portfolio with a flow diverting stent with the with the surpass of all stent.
And with this the 0.07.
Right for their vector catheter aspiration catheter so that for US was a product GAAP, we didn't have an easier to deploy.
Empty catheter approach for Florida, and extent and we didn't have a large bore aspiration catheter. So we plug those let's call them product gaps.
And we've had fantastic expansion.
For around the world and really the Atlas stent in China as an adjunctive stent for hemorrhagic is performing exceptionally well.
In this global business has really really well run and we have an index and exceptional leadership team over there that have been executing very well, but I would say the acceleration let's call. It this year's acceleration versus.
Spansion prior years is really driven by that this product cycle.
That really has us covering all of the basis with excellent products that are meeting the needs of our customers.
Understood. Thank you.
Your next question comes from the line of Richard <unk> of SBB.
Your line is open.
So we're taking the questions. Kevin you mentioned several times just how impressed you are with with with bright medical now that you've kind of had it under your operating belt for a few quarters now.
I'm just curious is there other than just.
The integration going better than planned.
Is there anything specifically other than the pipeline or embedded in that in that comment.
Really is it surprising you to the upside or make you more excited about the future.
You mentioned blueprint a few times something.
With blueprint.
I'm curious if there's something you know.
Your force.
Is there anything there or if it's just a general execution comment thanks.
Yeah, So listen we knew they had a good business and we knew that their culture was similar to strykers, but theres been some pleasant surprises along the way their talent is really excellent and a lot of times when we buy companies, we buy them for their products, but then we have to infused a lot of our.
Shattering.
They are leader for upper extremities their leader for lower extremities are leading our businesses. Our head of knees came from Wright medical and so we have an infusion of talent that.
For me has been a positive surprise I mean really outstanding leaders their sales leader for upper extremities is outstanding and.
Our manage that been 1 positive for a second I would say is their key opinion leaders. They absolutely work with Fabulous key opinion leaders on both upper and lower extremities and I would say that they are better of key opinion leaders than we had within Stryker and so those are 2 really to me pleasant surprises and just.
So pipelines, we thought they were good they've turned out to be a little better than we thought.
And that really applies across the board. So those there are certain things that you know when you do a public deal you don't get to do the same amount of due diligence as you do with a private acquisition.
And so those instincts, we had instincts that things were going to be good day theyre proving.
Just to be even better than we first thought.
That's helpful color. Thanks, and then maybe just second question conformance.
The initiatives that you have there I appreciate the.
The ASC help that product.
Can potentially offer the solution there and the benefits there just wondering.
Wondering where else the can format solution could go.
I'm thinking kind of with an eye towards robotics and digital surgery as well should we be thinking about about that being more meaningful going forward in other capacities outside of just ASC adoption. Thanks.
Yes, our primary focus was on the ASC, but there are a.
Moving to muscles that are concerned about sterilization and sterilization being.
Sort of a constraint and they'd like less trades they'd like less instrumentation. They liked like less space taken up in their stock room. So I wouldn't say, it's limited to <unk>, but that it really is out of the gates, let's say for the first 6 to 9 months, that's our prime focus is going to be on the ASC.
Because of their constraints on sterilization are the most acute but I would say that there probably will be interest beyond that.
But let's see that'll be more of a next year kind of commentary that I'd be able to give you.
Thank you.
Your next call comes from the line of Josh Jennings.
A lot of of Cowen.
You May proceed.
Okay.
Open to just follow up on some of the commentary on the spine business.
Kevin If you could just review your outlook on the value proposition of the current robots out in the market.
And maybe help us.
<unk> better understand the enabling technologies under under Strykers roof that don't get a lot of airtime and.
How we've gleaned stryker spine franchise can be competitive and in front of the Mako spine launch.
Yes, Thanks listen we're big believers in enabling technologies, we are obviously have that with Mako we.
Did the.
<unk> acquisition and we're very excited about the imaging aspect of that we do have a GAAP in spine robotics and we do believe that the first foray with the 2 competitive systems on the market today are really really good guidance systems for the placement of pedicle screws.
But it is providing value to surgeons and we definitely want to have something like that on the market.
Which was what <unk> was working on.
And then beyond that we think with Mako, we could get into other procedures and other applications, but but robotics is difficult. So it's going to take time for us to develop those applications.
We'll keep you posted but we do we are big believers in enabling technology and we're going to continue.
When you invest in that space.
Thanks for that and maybe 1 follow up maybe for you and.
And Glenn just as Youre moving towards the anniversary of the right acquisition and hopefully we're all moving towards more normalcy in 2022, you've had an RFP operating margin expansion.
<unk> with a range of 30 to 50 basis points and how how should investors be thinking about these cost savings programs have been played for the last couple of years.
And.
The amount of P&L leverage at Stryker, Ken Kenny experience in the future. Thanks, Thanks for taking the questions.
Yeah, Yeah sure I think first.
First of all as a baseline if you think about.
The normal operating margin that was acquired through right medical it was it was significantly less than say Stryker as normal operating margin. So if you think what have we worked on during this integration period. It was really pulling Wright medical up and trying to look for all the synergies.
<unk> had built into our model. So that we can drive better operating margins at Wright medical I think fast forwarding into next year and looking at.
Where that might look on a combined basis I think we will get back to our normalized op margin expansion of 30 to 50 basis points.
At this point, that's a little ways away and we're not really necessarily guidance for 2022.
Yes.
Your next call comes from the line of Kyle Rose of Canaccord. Your line is now open.
That was great. Thank you very much for taking the question. So a lot's been asked but we do have.
Pos coming up.
In a few months here and I'm wondering if you could just touch on maybe what some of the focus is.
That investors will see you at the conference I mean, when I think about what's happened over the course of the last 12 months you have acquired ortho sensor.
You did touch on a little bit.
<unk> in a box you know ASD knee opportunity there and obviously robotics is getting a lot of attention in the ASD is in the outpatient setting. So maybe just level set us on expectations into the conference.
Yes, listen we don't have a big reveal at this conference as you say we.
And we will have the.
The <unk> product that we can talk about triathlon S..1 we have mako, which is still going to be talked about quite a bit, especially with the new head hip application, that's starting to gain some steam but still takes time to get that socialized more broadly in.
In addition to that we have we have recent approval of.
We'll talk in space balloon for large rotator cuff repair within our sports medicine business, which is a very exciting product in and out.
Product used by sports medicine surgeons as well as the surgeons that do shoulder arthroplasty that come from Wright medical. So that's also an exciting product so and as well as the perform humeral product that Glenn mentioned.
The earlier on with Wright medical so a number of new products, but it really frankly, an exciting time to get back with our customers at scale and not having that conference last year was certainly a GAAP.
We really look forward to engaging with our customers once again and so that that's really what we're going to be showing its not something brand new that we're going.
And failing but really more of just continuing the momentum that we already have.
Great and then the second question.
Is I think earlier you'd noted that when physicians do move procedures to the outpatient or ASC either typically using there.
Standard instrumentation sets or the same implant systems that use in.
And have you seen any any changes in pricing or types of contracting that youre seeing when your ASC team does go out to engage on driving the initiatives there.
No. Thus far we're not seeing really any change in implant pricing. What we are seeing is because of the capital requirement.
We are seeing deals that involve multiple businesses of stryker.
We're seeing much more of that than we see in the hospitals. So the deals that we do typically involve 4 or 5 different businesses of stryker, whereas hospitals tend to by product category by product category.
But no real change on pricing.
Your next call comes from the line of Matt Taylor of UBS. Your line is open.
Alright, great.
Yeah on the and from there.
Alright, thanks for taking our questions.
Maybe just 1 question.
Smoke evacuation.
You mentioned explore several.
Quarters now.
It'd be great. If you can talk a little bit about the drivers for growth in recent quarters.
Staying ability of growth going forward, especially on the other side of Covid. Thanks for taking my question.
Yeah, absolutely. So so we're very pleased with smoke evacuation and what that business does for us in.
Of our ability to grow as we look at it we really look at ourselves as market leaders behind our broad our broad portfolio and it's 1 of those businesses that actually sits across a couple of different divisions, both the instruments and also within endo.
Our endo businesses in.
In terms of what our expectations are I mean, we're really going to continue.
In terms of to expand as that market continues to expand both in the U S and outside the U S.
Really driven by legislation and really the desire around a safer operating room behind smoke free operating rooms.
Thank you.
Your next call comes from the line of Jeff Johnson of Baird. You May proceed.
Thank you good afternoon, guys I'll be quick just 1 Kevin I would be interested it's always tough as an early reporter for you guys to know market share shifts and things like that and then the volatile numbers. We're getting from everybody. These next couple of quarters will be even tougher just wondering kind of momentum.
Due to some wise that you're seeing with surgeons in your core ortho business can you talk to hips knees trauma spine any of those 4 areas, where you've seen maybe a change at all good or bad and momentum do you think of pulling surgeons and then on a competitive front that'd be helpful. Thank you.
Yes, listen it feels good to be sort of sort of getting back.
To normal it isn't totally normal there are these pockets of disruption.
But I would say debt that surgeons are starting to fill up their schedules are taking meetings with us they're coming to trainings and so we feel like we're sort of almost getting back to the kind of rhythm. We had before you can see it in our guidance I mean, it's a pretty bullish guide to.
To say, we're going to 9% to 10% organic plus.
<unk> performance out of Wright medical which was an integration that pretty complex involving the trauma extremities as well as our joint replacement business because those businesses used to be under common sales management, and we pull those out and so b to be able to do all of that and have this kind of a wind.
Our back is pretty exciting and I would say customers are ready to engage AOS I think will be will be a pretty big conference and based on what I'm hearing it'll be fairly well attended and I think those are great opportunities for us to be able to.
So the power Stryker and what we can offer to our customers.
Anything in those 4 core areas of orthopedics, though where.
Are you seeing kind of a change in your competitive positioning where just over the last 3 to 6 months or so are you may be feeling a little bit better or worse about your positioning in bringing in competitive accounts.
I would say more of the same.
Look at that knee number that's a pretty good knee number and that that is in the killer application with Mako.
And Mako was very very strong as you saw through the pandemic and I think that'll continue to be probably the 1 business that stands out obviously upper extremities is going to continue to be.
Very very strong performer, but I would say that's the 1 that probably were feeling continued bullishness. If you will but there's not been really any other new dynamics just in the.
The last quarter.
Thanks, John Thank you.
There are no further questions at this time I will now turn the conference over to Mr. Kevin Lobo for any closing remarks.
Well. Thank you all for joining our call. We look forward to sharing our Q3 results with you in October.
Thank you.
Yeah.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
Okay.
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Okay.
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