Q1 2022 Stryker Corp Earnings Call
Sure.
Welcome to the first quarter 2022 strikers earnings conference call.
My name is breaker and I'll be your operator for today.
At this time all participants are in a listen only made following the conference we will conduct a question and answer session.
This conference call is being recorded for replay purposes.
Before we begin I would like to remind you that the discussions during this conference call will include forward looking statements factors that could cause actual results to differ materially are discussed in the company's most recent filings with the SEC.
Oh, sorry, the discussions will include certain non-GAAP financial measures.
Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release.
That is an exhibit to Strykers current report on form 8-K filed today with the Shack I will now turn the call over to Mr. Kevin diabetic.
Yeah, and Chief Executive Officer, You May proceed Sir.
Thank you welcome to Strykers first quarter earnings call. Joining me today are Glenn mainline Strykers, CFO and Preston Wells, Vice President of Investor Relations.
For today's call I'll provide opening comments, followed by Preston with an update on the trends we saw during the quarter as well as recent acquisitions Glenn.
Glenn will then provide additional details regarding our quarterly results before opening the call to Q&A.
For the quarter organic sales growth exceeded 9% with double digit growth from our med surge in neurotechnology businesses led.
Led by Endoscopy instruments and neuro cranial.
Orthopedics and spine businesses delivered high single digit growth highlighting procedural recovery throughout the quarter.
Internationally, we posted mid single digit organic growth highlighted by double digit organic growth in Europe and emerging markets.
During the quarter, we continue to have robust demand for our capital products. However, we had meaningful shipment delays as a result of ongoing product supply challenges, mostly affecting our large capital businesses for.
For the quarter, we delivered adjusted EPS of $1 97, reflecting growth compared to the first quarter of 2021, despite the ongoing impacts from inflationary pressures and significant premiums on inventory spot buys.
We expect the supply chain pressures to persist throughout the year, although they will moderate with less reliance on spot buys in the second half of the year in.
In addition, we continue to invest in R&D at a healthy rate of seven 2% of sales demonstrating our continued focus on our new product pipelines disc.
Despite the ongoing supply chain pressures and the continued coalbed volatility in certain regions of the world. We remain confident in the outlook of our business and we expect to continue to deliver sales growth at the high end of Med Tech.
However, as previously mentioned despite continued disciplined with our spending the pressure on our supply chain will impact our ability to deliver earnings leverage in 2022.
With one quarter behind us a very strong order book and these macroeconomic dynamics, we now expect full year organic sales growth towards the high end of our guidance range of 6% to 8% and expect adjusted earnings per share at the lower end of our guidance range of $9 60 to $10 a share.
During the quarter. We also closed the acquisition of a Sara and I am excited about the highly complementary and innovative portfolio that <unk> brings to our medical division.
We believe that this deal will drive strong value creation in the years ahead.
Finally, I am pleased about our ongoing commitment to our talent and culture, which is reflected in the recognition of Stryker for the 12th year in a row as one of Fortune's 100 best companies to work for.
Over this time, our employee base has moved from 20000 to 46000.
I'd like to thank our leaders for maintaining our positive culture as we have grown.
In addition, we also published our second annual comprehensive report during the quarter, which captures our environmental social and governance strategy and details our commitments and disclosures on our three pillars of corporate responsibility stronger people healthier planet and good business overall.
Overall, I am pleased with our start to the year. Despite the challenging macroeconomic environment and believe we are well positioned for the future.
I will now turn the call over to Preston.
Thanks, Kevin My comments today will focus on providing an update on the current environment, including the procedural and geographic trends during the quarter. In addition, I will provide an update on our continued integration of Wright medical and <unk>.
Actual integration progress of the most arrow business.
After being impacted in January by the AMA crime very procedural volumes recovered sequentially throughout the quarter as COVID-19 related delays and restrictions ease.
While we see while we are seeing volumes recovered towards more normal levels. There continues to be some overhang from hospital staffing shortages, which is causing scheduling disruptions around the world. This improvement in procedural volumes is primarily impacting our implant related businesses, including hips knees spine and extremities.
In addition to the procedural recovery our double digit growth in knees continues to benefit from the growing Mako installed base. We also grew high single digits in foot and ankle upper extremities in hips, driven by continued new product penetration.
Within our hips business the launch of the new insignia hits them, along with the Mako for one software, which also incorporates insignia into the Mako robotic platform continues to proceed well and should be a tailwind to our business throughout the year.
Geographically procedures recovered during the quarter in the United States, Europe , and Latin America, which resulted in strong double digit growth in those regions.
Procedural trends in Asia have been more volatile due to the ongoing COVID-19 related impacts with Japan, and Australia, you're beginning to see improvements towards the end of the quarter, while other parts of the region saw COVID-19 rates peak in March.
And China Covid related impacts were more widely seen beginning in March and we expect to see negative impact on procedural volumes in China. During the second quarter as a result of strict lockdown restrictions across major cities in the country.
Demand for our capital products remained strong in the quarter, including double digit growth in orders, which bolstered the strong order book for capital products that we carried over from 2021.
As a reminder, our capital business makes up less than 25% of our total sales with under 10% coming from large capital items like beds, robotics, booms and lights and the remainder coming from small capital products like power tools and cameras, which facilitate surgical procedures.
The strong demand in the quarter is occurring across our portfolio, including our small capital products within instruments, endoscopy and neuro cranial that support the recovery of procedural volumes.
While we experienced solid growth from our capital businesses in the quarter. The growth was limited as a result of ongoing headwinds, including raw material shortages, primarily related to electronic components and installation delays because of hospital staffing challenges.
The raw material shortages have had the largest impact in our medical business, both within our acute care and emergency care business unit.
These macro challenges, we will continue to be pronounced in the second quarter we.
We continue to partner closely with our customers to ensure we are meeting their more immediate and longer term capital requirements.
Turning to our key integration activities. The integration of Vocera is in its early stages and we are pleased with how the teams are working together to maximize the opportunity on.
On a pro forma basis to most arrow business continued its strong double digit momentum during the quarter.
And finally, the Wright medical integration continues to progress well across all regions, which is reflected in the double digit growth of our U S trauma and extremities business during the quarter, which was led by excellent performances in both U S foot and ankle and U S upper extremities.
In summary, while the macro environment remains volatile procedural volumes are improving and the underlying demand for our products remains strong which gives us confidence in our ability to continue to drive market, leading growth with that I will turn the call over to Glenn.
Thanks, Preston today, I will focus my comments on our first quarter financial results and the related drivers.
Last quarter sales comments will be provided based on our new reporting structure. Our detailed financial results have been provided in today's press release.
Our organic sales growth was nine 2% in the quarter. The first quarter's average selling days were in line with Q1 2021.
The impact from pricing in the quarter was unfavorable 1%.
Foreign currency had an unfavorable one 8% impact on sales during the quarter, we saw a recovery of surgical procedures and accelerated sales momentum as the impact of the COVID-19 pandemic has eased in the U S and Europe .
However, our sales growth has been constrained by continuing supply chain challenges and electronic component shortages, especially impacting the capital products in our med surge businesses and primarily our medical business.
Our capital Order book has continued to be very robust as demand from our customers has continued to be strong.
For the quarter U S organic sales increased by 10, 5%, reflecting strong double digit growth in many of our businesses International organic sales showed growth of 6% impacted by positive sales momentum in Europe , and emerging markets somewhat offset by lingering COVID-19 impacts in Australia, Canada and China.
Our adjusted quarterly EPS of $1 97 increased two 1%, reflecting sales growth, partially offset by a higher tax rate and gross margin inflationary pressures.
Our first quarter EPS was negatively impacted from foreign currency by <unk> versus 2021 .
Now I will provide some highlights around our segment performance in the quarter med surge in Neurotechnology at constant currency sales growth of 12, 1% with organic sales growth of 10, 8%, which included 12, 2% of U S organic growth.
Instruments had U S organic sales growth of 16, 3% led by strong growth in their orthopedic instruments and surgical technologies businesses highlighted by growth in search account waste management smoke evacuation and stir our shield products.
Endoscopy had U S organic sales growth of 17, 7%, reflecting strong performances across their portfolio, including video products and double digit growth of their communications and smart sports medicine businesses.
The medical business, which includes our recently acquired Vocera business, which closed in February had U S organic sales growth of six 2%, reflecting solid performances in their stage in acute care businesses somewhat offset by the aforementioned supply chain challenges, primarily impacting our emergency care products.
During the quarter. We also saw significant growth in orders for our acute care and a merchant emergency care businesses, driven by very strong demand, assuming normalization of the customer environment and certain <unk>.
A reduction of certain supply constraints, we expect these orders to contribute to another strong year for medical in 2022.
Our U S neurovascular business posted an organic decline of one 4%.
Versus a very strong comparable growth of approximately 20% in 2021.
The U S neuro cranial business posted organic sales growth of 16, 6%, which included solid growth in our Max face NFC drilled in bio reabsorbed herbal products.
Internationally med surge in Neurotechnology had organic sales growth of 7%, reflecting double digit growth in the endoscopy in neurovascular businesses G.
Geographically this included strong performances in China and Australia.
Orthopedics and spine had constant currency and organic sales growth of seven 2%, which included eight 2% of organic growth in the U S. This reflects the impact of the ramp up in surgical procedures during the quarter.
Our hips business grew eight 5% organically in the U S, reflecting strong primary hip growth fueled by the launch of our <unk> Sigma hip stem and improved underlying market dynamics.
Our knee business grew 17, 5% organically in the U S. Reflecting the previously mentioned strong recovery procedures, and our market leading position in robotic knee procedures.
Our U S trauma and extremities business grew 10, 6% organically, reflecting double digit growth in foot and ankle upper extremities and biologics.
Our U S spine business grew three 7% organically led by the performance of our enabling technology products.
Other ortho declined organically in the U S. As the impact of hospital operational staffing challenges and lengthening purchasing cycles limited our ability to place makos during the quarter.
Comparatively in Q1 2021, other ortho had growth of 49%.
Assuming normalization of the customer environment, we expect another strong year for Mako in 2022.
Internationally orthopedics and spine grew four 8% organically, which reflects the strong momentum in Europe as surgical procedures ramped up as well as a strong performance in hips and knees in Japan somewhat offset by lingering COVID-19 challenges in Australia, Canada and China.
Now I will focus on operating highlights in the first quarter.
Our adjusted gross margin of 64, 1% was unfavorable approximately 130 basis points from the first quarter of 2021.
Compared to prior year, our gross margin was adversely impacted by purchases of electronic components at premium prices on the spot market and other inflationary pressures primarily related to labor electronic components steel and transportation cost as well as operational inefficiencies due to the app.
You mentioned raw material shortages.
We expect these adverse impacts to continue throughout 2022 and to be more pronounced in the first half of this year.
Adjusted R&D spending was seven 2% of sales, which represents a 35 basis points increase versus first quarter of 2021.
And this reflects our continued commitment to innovation funding and the related future growth it will provide.
Our SG&A was 35, 1% of sales, which was five basis points lower compared to the first quarter of 2021. This reflects continued cost discipline and fixed cost leverage offset by the ramping up certain expenses and hiring to support future growth.
In summary for the quarter, our adjusted operating margin was 21, 8% of sales, which is approximately 160 basis points unfavorable to the first quarter of 2021.
This performance is primarily driven by inflationary impacts, resulting in gross margin challenges and other continued investments in innovation somewhat offset by our sales momentum and cost discipline.
Other income and expense decreased as compared to the first quarter in 2021, primarily resulting from an equity investment gain as well as lower interest expense.
Our first quarter had an adjusted effective effective tax rate of 13, 9%, reflecting the impact of geographic mix and certain discrete tax items for the full year. We continue to expect an adjusted effective tax rate of 15% to 16%.
Focusing on the balance sheet. We ended the first quarter with $1 5 billion of cash and marketable securities and total debt of $13 9 billion, which.
Which includes the additional $1 5 billion of debt raised to fund the Vocera acquisition.
During the quarter, our long term credit rating at S&P was downgraded from a minus to BBB plus and our long term rating at Moody's was reaffirmed at <unk> one.
Turning to cash flow, our Q1 cash from operations was $203 million.
This performance reflects the results of net earnings and continued focus on working capital management, partially offset by the impact of pre buying certain electronic component inventory.
And approximately $130 million of charges related to the stock compensation payments for the Vocera acquisition that are accounted for in operating cash flow.
Given the dynamic supply chain pressures Covid uncertainty strong order book for capital equipment, and considering our first quarter results. We now expect full year 2022 organic sales growth towards the high end of our previously guided range of 6% to 8%.
This performance assumes that the recovery environment experienced in Q1 continues to improve throughout the rest of the year with a normal procedure environment returning during the second half of the year.
If foreign currency exchange rates hold near current levels, we expect net sales in the full year to be adversely impacted by approximately one 2%.
Adjusted net earnings per diluted share to be adversely impacted by approximately 10 10 to 15 and the full year and this is included in our guidance range.
Based on our performance in the first quarter and including consideration of the continued supply chain challenges the inflationary environment and the anticipated impact related to foreign currency. We expect adjusted net earnings adjusted earnings per share towards the lower end of our previous guidance range of $9 60 to $10 per share.
<unk>.
The low end of the guidance range assumes the continued macro environmental volatility persists, including inflationary pressures that could impact cost, particularly our cost of sales and includes more transient spot buying and longer term supply chain challenges.
We will continue to evaluate the changing environment and will provide updates to our guidance as necessary and now I will open the call up for Q&A.
Thank you.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys.
If any time your question has been addressed and you would like to withdraw your question.
Please press Star then Keith.
We will limit questions to one at a time and if you can please rejoin the queue.
At this time.
These pools.
As we begin the Q&A session.
The first question we have comes from.
Hey, Jay Kumar of Evercore ISI.
Your line is open.
Hey, guys. Thanks for taking my question and congrats on the strong print here.
Maybe one on.
The capital environment, Kevin There has been a lot of questions on <unk>.
On the hospital capital budget cycle, maybe talk about your order book, how it's perhaps different.
I couldn't help but observe.
The other line item, which includes Mako was down year on year I understand the tough comp was just comps ora or anything to do with the capital cycle here.
Yes, sure Vijay first I'd tell you that the hospital liquidity is still very strong and as a result, our orders have actually grown in the quarter. We had a strong order book coming into the year and we added to that very significantly with strong double digit growth in orders in the first quarter and as we mentioned in our opening remarks.
Large capital has been disrupted partially because of shortages of primarily electronics, but also hospitals ability to actually receive the capital either because of short staffing or because some of their construction projects were delayed I'm not concerned about the shortage and other ortho for the first quarter, our order book for <unk>.
It was very very strong we had a lot of delays in actually installations and theyre going to have a strong year overall and certainly we did have a big comp from the prior year, but the order book for Mako is very strong the order book for all of our capital is very strong you saw the actual sales results in instruments endoscopy neuro cranial.
Small capital in fact is.
We were able to largely meet.
Those orders that were growing our challenges is meeting the orders of larger capital primarily medical but also.
To a lesser degree to make them, but overall no concerns as strong demand for Mako and you saw there.
Results in the hip and knee business that.
That really benefits from the strong performance, we had mako throughout the pandemic.
That's helpful. Kevin and then maybe one London guidance here to one off to a really strong start here, 9% organic.
The guide 6% to eight now now it looks like you guys are pointing towards the high end.
Is there, perhaps some conservatism baked in when you look at the back half as I said, we have comps are.
7% average for the back half if the recovery trends.
Persist.
Perhaps it seems like the top line is a little conservative maybe walk us through the assumptions for the back half.
Well, we're not going to give guidance by quarter Vijay, but what I would tell you is the second quarter, we had very difficult comps. If you remember the second quarter of last year was extremely strong and yes, you are right that Q3 and Q4, the comps do get a lot easier.
I would say that we are still a little bit nervous about our ability to meet the demand for these orders in capital.
Because of the supply chain pressure. So there is a little bit of conservatism baked into that.
Just because the environment is pretty uncertain, we do assume a improvement continued improvement in procedural volumes.
If that continues to play out well and certainly there is a potential for us to do even better than what we've guided but based on what we know today that we feel pretty good about sales at the high end of the original range given the strong start to the year.
And the strong order book.
Thank you we now have the next question from.
Matt Mitchell from Credit Suisse. Please go ahead your line is open.
Hey, thanks, so much and congrats on a really strong quarter.
So Kevin and I will ask a question because I'm sure folks are wondering and then I have one quick follow up if that's all right, but just follow up on Bjs question about the robot trends.
Is this a you know would you say this is a.
These are challenges that all.
All competitors across large capital robots, and otherwise are having putting systems into hospitals at the moment or another.
In other words would you expect that these aren't things that are going to put you at a disadvantage competitively over the next several quarters and I just one one quick follow up.
Hey, Matt It's Preston Youre right its something that were seeing across the board as Kevin said, it's really more of a macro elements around the ability for hospitals to be able to put the equipment in and get it installed is driving it and so thats something that everybody is facing you've heard that from several folks as well. So it's not something that puts us at a disadvantage.
As Kevin mentioned, we feel very strong about where we're headed for Mako and what we're expecting to deliver who make up this year.
Great and then a follow up on hips, just to give us some perspective.
It was a really nice bump up.
Pierre on.
On the back of these launches that you described I'm just wondering if you could give us some sense of how confident we should be about.
Is that going forward or is there some trialing or theres a couple of quarters here that we should sort of need to digest the interest in the hips or do you really feel like you've turned the corner.
Thanks.
Yes, I would say that we certainly are very pleased with the initial the initial.
The launch of insignia as we've recently just launched at double AOS. So it is certainly an indication as we think about going forward and what we expect to drive from our hips. So we're happy with the initial phases of the launch we expect insignia will continue to provide a tailwind along with Mako along with the recovery of procedural procedural volumes.
Thank you.
We now have a question from will be Marcus with JP Morgan.
Maybe you May proceed.
Hi, great. Thanks for taking the question congrats on a nice quarter.
I wanted to ask on down the P&L and you mentioned cost headwinds a couple of times.
During the presentation and you were able to still hold the guidance range, albeit at the lower end I was just hoping maybe you could walk us through sizing some of these impacts and the cadence as it flows.
Into and out of the P&L as we start thinking about bill.
Building second third and fourth quarter. Thanks, a lot.
Yeah Robby.
I would tell you that.
When we when we gave guidance back in January we discussed pressure of 50 to 100 basis points.
On our gross margin and I would tell you that that is looking like it is trending to the to the upper end for the full year.
And if I think about where we're going to feel most of that pronounced increase it's probably Q1 and Q2 here with some easing in Q3 and Q4.
If you think about the types of cost obviously, there are the spot buys where were paying pretty exorbitant prices.
For chips and the related electronic components, but there are also increases in labor or supplier labor.
Warehouse and distribution costs are going up and then related to that just because of supply shortages. We're also feeling a little bit of the inefficiencies that that might be driving in our own manufacturing facilities.
So all of those are obviously putting pressure.
On our gross margin and then the last thing I'll mention and I know this is probably come up in other calls is just freight is another place where we're seeing real increases.
A lot of that is just because of the tight supply chain and even the tightness of our ability to deliver products to our customers. We're seeing a lot of overnight deliveries, we're seeing a lot more air freight when normally we would use a more economical mode for freight so all of that.
Kind of compounding in terms of.
What we're what we're implying is inflationary pressures I do see some of that easing up but I would tell you for the longer term.
These labor costs. These transportation costs are probably a little more permanent than some of the other cost as we think about it and then moving down the P&L.
If you think about what we're spending in R&D. We just we're not backing off of that innovation spend we really honestly think it's very important to keep that product pipeline going and keep it robust launches like our signature hip.
We're going to we're going to be able to fuel growth as long as we continue to fund that R&D on the further down in SG&A.
We have tried to moderate some of the more discretionary SG&A costs, but the single biggest cost there is <unk>.
<unk> commissions and as long as our sales force are out there selling we're going to continue to pay them and pay them well because it is important to us.
Beyond that.
We have some moderation in other income and expense and I gave you the guidance on tax. So I think we're trending pretty much in line with all of that.
Great I appreciate that if I could sneak one quick follow up and we heard from Baxter. This morning.
They have a growing order book like you in that they're hoping to be able to.
Shorten it and sell through throughout 2022 is that your expectation as well that the chip supply should.
Improve and youll be able to clear a lot of the order book.
In 2022.
Yes, Ravi I think that we certainly believe that we're going to work through that backlog. It's still early days as we are confronted with the supply challenges and were certainly working actively with those chip suppliers and trying to get through and as Kevin mentioned.
Certainly second quarter will be a little bit more disrupted than we think about the later latter part of the year. So we'll work through it throughout the year, we're not as we think about our overall guidance and certainly getting to that upper end or exceeding that upper end would mean working.
All the way through the entirety of that backlog. So right now what we're doing is really focused on just getting the supply and working through it for the remainder of the year.
We now have.
Larry <unk> of Wells Fargo.
You May proceed Larry.
Good afternoon, thanks for taking the question.
I wanted to start with the inflation and pricing. So just how are you guys kind of managing the rising cost and what's your ability to offset it.
And where are you guys able to take price it looks like price got a little better if I'm looking.
At Q1 versus Q4, if I'm looking at that correctly and I had one follow up.
Yes, Larry Thanks for the question. So we're looking at a few different ways. Obviously, we continue to focus on some of the internal projects that we had going with CTG to dato that it really looking at how we change our cost structure, but beyond that we are looking at areas around price and just as a reminder, we do have some businesses that historically, we've been able to gain some.
Pricing, particularly on our med surge in Neurotechnology businesses.
But as we look at all of our businesses in the future as we have contracts that are coming up on our orthopedic side, we will be looking at whatever price actions that are appropriate at that point in time and along the med surge business again same thing we'll be looking at price actions as appropriate going forward. So we are looking at that as a way to continue to help with the rise in inflation.
Thanks, That's helpful. And then I know China is small for you guys, but a little more color on what youre seeing on the ground there from the Lockdowns and your expectations for the V BP for for Recon, which it seems like it's delayed to the second quarter, and then trauma and neurovascular, if theres anything on the horizon. There. Thanks, so much.
Taking the question.
Yeah, So Larry on China as you mentioned it is small it's about 2% of our total business and those products that are being currently impacted by the BP. So think about joint replacement trauma and extremities are less than half of that and so we have that factored into our guidance. We've talked about that before so we're expecting that to really play out this year.
Year from a trauma and joint replacement standpoint, Neurovascular is early days there are some activities happening in a province level. So we're still early in that process and don't really expect any major impacts there for 2022 in terms of what we're seeing on the ground with regards to the Covid impacts.
We're seeing the same thing that everybody else is hearing.
Strict lockdown policy is certainly having an impact on procedural volumes and we expect that to continue to play out in second quarter, where it goes from there I think is still to be determined, but we would expect probably easing as they go through this latest wave.
Look probably towards the back half in terms of procedural volumes.
Thank you.
The next question is from Joanne.
Listen niche from Citi. Please go ahead Joanne.
Thank you very much for taking the question I want to spend a little bit of time talking about the Sara.
The closing of it and your expectations for growth in revenue.
This fiscal year.
Yes, Julian Thanks for the question on boats here I mean as I mentioned in my prepared remarks, it's very early we just closed the deal in February when we announced the deal we talked about our general expectations in this marketplace. We're the market and the sales are growing in the teens and so we would expect that to continue.
Initially, but as we get it integrated into our businesses and we're going to be able to accelerate the growth, although it's area by being able to put it into more hands and more hospitals. So we do expect it will be accelerating throughout the year, but again. We're early early days in terms of the integration, yes. The only thing I'd add Joanna is so far so good in terms of retention.
Are you able to retain a lot of employees that we had identified frankly all of the key employees have been retained and the integration efforts, even though its early we had a very good month of March.
No disruption whatsoever in the sales cycle.
So while it is early so far so good and we're very bullish on the prospects of those are having a very good year this year and obviously continuing into the future.
But to put a little finer point on that what is your expected impact on revenue and EPS, because we have organic revenue and we have an EPS range.
And I would assume this is incorporated in your updated guidance.
It is incorporated in our updated guidance. So as we said from the beginning we expect them to continue into and Youll see it in the inorganic numbers every quarter, you'll see where both arrow shows up.
See very strong double digit growth on the top line and what we said on the bottom line is that it certainly.
If there's a modest impact on the bottom line, so really nothing nothing related more to add there we're going to fuel the growth it'll be a good year this year and it'll be accretive starting next year.
Thank you.
We now have Peter Chickering with Deutsche Bank. Please go ahead, when you're ready.
Good afternoon, guys. Thanks, taking my questions. One more question on the inflationary pressures can you provide some color on what percent of the practice gaming freight versus raw materials, such as labor I'm trying to understand how much of this pressure is sort of permanent like labor.
And in 2023.
Practices are trending to the high end of 100% basis point, you talked about last quarter, what do you assume that ends in the fourth quarter.
Yes.
We aren't going to provide that breakout in terms of the various parts of the business I mean, it does continue to fluctuate around depending on.
Some of the shortages are like Glenn said, if we have supply shortages. We are seeing increases in freight it's more mix based on airfreight and things like that so we're not going to provide that breakout certainly we do expect as Glenn mentioned, there are going to be some portions of this that will be more permanent in nature and some that'll be more transit as we go through where it lands I think we are.
Still early and certainly as we think about our guidance that we laid out we do expect it to have impacts as we continue throughout the year, but certainly within the range of the guidance that we provided.
Okay, and then talking to you about the hospitals or recently.
Youre talking about lots of Pi in the patients that they're seeing just back to this pricing question. Do you guys think that you have the ability to pass on some price help offset some of these inflationary pressures and kind of how.
When we think about prices.
Four different divisions or different geographies. Thanks, so much.
Yes, So I think the answer is yes. I mean, we are we are evaluating that we're looking at pricing actions across our businesses and it will be different there'll be different based on the different types of businesses that were in the contracts that are in place.
And in different geographies for sure. So it's not going to be a one size fits all as we think about this it'll be a very deliberate approach across our different business units and across our different geographies.
So let me just to quantify that is negative 1% price here in the first quarter. I think we can end the year is for flat or kind of how much price we can get during the year yes.
Yes, not something that we're guiding on.
Thank you P. J, we now have.
A question from Ryan Zimmerman of <unk>. Please go ahead, when you're ready.
Yes, thanks for taking the questions I want to follow up on a couple of things Glenn on your comments on EPS guidance. You said that you continue to expect more transient spot buying in long term supply challenges I think that was pretty clear in your messaging, but you know as I think about companies like Hologic last night, you saw incremental headwinds on some of these <unk>.
Chronic components more than they initially thought I mean, how how derisked have you I mean at the low end of that 960, how comfortable are you that if this market gets worse or electronics that we wouldn't have to go lower I mean, how how much have you incorporated there I guess.
Yes.
That's a tough tough question I mean I think.
I don't have a crystal ball what I do have is I can see what we have pre bought and our inventory I do have the inputs from our suppliers and how they are looking at that sort of chip availability.
And I also see you know the amount of activity that we have currently ongoing in terms of buying in the spot market and I would tell you that.
Q2 is probably going to look pretty similar to Q1 in terms of that kind of pressure, but I am building up inventories and on building up component inventories.
And so I expect it to ease a little bit as I look at Q3, and Q4 and I think right now.
That's the best I can do in terms of sort of eyeballing in where I think the impact of that will be in the P&L and also in terms of where our guidance is coming in I think.
We didn't lower our guidance from from Q from January because we still saw a pathway to get within this guidance based on the activity we're seeing now.
Okay I appreciate the color there and then Kevin.
I appreciate the comments about neuro vascular, having a tough comp, but as we think about that market, particularly in the U S and the product profile today, how do you think about the long term growth rate in the neuro vascular segments, given kind of where we're at.
The performance, we saw this quarter and what gets you back to kind of that sustained long term growth rate.
Yes look I still think this is a fabulous market long term. There's just no question. Its a great market, we had a tough comp.
There also was a bit of competitive activity in the U S. In the ischemic side of the business. We see this from time to time from quarter to quarter. So we certainly weren't expecting double digit growth in the U S. It was a little lower than we expected because of the competitive activity, but nothing too alarming.
We will have a very strong year, we're going to have a double digit growth year in neurovascular globally.
In the U S will pick up in Q2, two three in Q4, so it's still a great market early treating a small fraction of the patients that that have stroke today and for that reason with the pipeline and a great leadership team that we have over there and neurovascular I know that there's going to be a very good long term business.
Thank you.
I have David Jackson does need Herman Kay.
Your line is open.
Good afternoon, and thanks for taking the questions just wanted to.
Get a sense on if youre seeing backlog procedures come back and if so kind of where youre seeing.
Those those concentrated whether its hips or knees or spine.
Yes. Thanks for the question. So in terms of the backlog as we've said in previous calls is the backlog has built up over really the last 24 months is as many patients hadn't had procedures done. So certainly we saw the uptick with procedures being done this past quarter, it's hard to say what portion of that was <unk>.
Log versus new patients entering the entering into the funnel. So there has to be some piece of that backlog. That's been worked down but really for the full backlog to be worked through it's going to take a sustained recovery. So we are thinking about many quarters of recovery.
And being back to normal that's going to get that backlog all the work all the way down in terms of where it's coming from it's really going to be across all of those those products.
Or more deferrable, so hips knees spine somebody extremities products that we would expect to see that coming for them, but as I. As we've said previously really is going to take several quarters of sustained normal that will work that full backlog down.
Okay, great Thanks, and just on the.
The U S spine, three 7% growth just wonder.
How do you think you did from a market share perspective, and whats driving your growth. Thanks, so much for chicken.
Yes, it's early in terms of the overall market market growth assumption, but just like we we look at hips and knees were pleased with the quarter. We're pleased with with procedures recovering certainly having an impact on spine.
We're happy with our product portfolio and so we do expect that's fine we will continue to benefit as procedures come back to more normal levels throughout the rest of the year.
Thank you. The next question is from Matt O'brien.
Brian of Piper Sandler.
Please go ahead.
Hi, guys. This is drew on for Matt. Thanks for taking the question.
I just wanted to follow up.
<unk> with maybe a little bit more of a high level question.
We're obviously translating.
<unk> from <unk>.
Pandemic to a post pandemic environment, which will presumably resulting in the changes in some hospital environments have operated.
Compared to the last couple of years is that changing how your customers are thinking about the value proposition of our use case for most here at all.
Well I think the pressure.
Being put on the health care system, and particularly nurses.
It was obviously very acute during the pandemic and with the shortages that are out there right. Now hospitals are looking for solutions that are going to help keep their nurses engaged.
Ensure that their arrows arent being made in the hospital improved workflow. So I think our timing is perfect and that <unk> should be able to take this as a tailwind that's not that's not over I think this tailwind will continue to last for the next couple of years because it does provide.
Really a reduced cognitive load for nurses it makes their jobs easier. They are much happier when we have <unk> in there in their hospitals. So we're really excited we think our timing is really ideal and this is a multiyear tailwind.
That's all for me thank you.
Okay.
Thank you we now have Jason <unk> of loop capital. Please go ahead, when you're ready Jason.
Hi, Thanks for taking my questions just on cash flows.
Obviously, you're having some P&L impact from.
Inflationary expenses.
How is that impacting your cash flows and generally speaking what what sort of cash flow generation should we anticipate for this year and I guess related to that when do you think you get back to a point, where we could see another rosa like sized acquisition from Stryker.
Yeah.
Yeah.
Yeah, I'll tell you what I'll take the cash flow on and I'll have Preston talk about the.
M&A one so on cash flows.
A couple of places, where we're feeling the inflationary pressures that flow through with earnings first and foremost.
And we will see that all year long as those flow through all the way to cash flow I think the other thing that you can see is that because we're in a position where were pre buying inventories in raw material inventories to make sure we have enough supply.
We'll see increases in inventory that may be under normal conditions, we wouldn't necessarily have.
In terms of where I think cash flows will land.
I still think we're seeing really good performance in working capital.
We are performing relative to guidance in terms of capex spending and so those fundamentals are still in place.
I would still expect us to deliver sort of a 70% to 80% free cash flow conversion, excluding the vocera impact related.
Related to that acquisition, the 130 million that related to.
Our payout of.
Related to the employees acceleration of options and their stock. So aside from that we will still be in that 70% to 80% range.
Yes, so in terms of acquisition sorry.
Sorry in terms of acquisition activities as we move forward as we've said previously following the Vocera deal. Our first our first focus is going to be on pay down the debt.
And then we will certainly continue to evaluate tuck in opportunities along the way as well as we think about larger type deals like most era. It really is going to depend on a couple of things I think number one the cash flow performance as Glenn mentioned before and then the second is really going to be about the opportunities I mean, we're not vintages do large larger size deals.
To do that and certainly its going to be the right opportunities I think overall just thinking about it we still have the bandwidth to continue to operate in that space and complete those type tuck ins and eventually get back to those stereotypes type size deal.
Thank you I appreciate that detail if I could just maybe a clarification on Mako did I hear you earlier specified that there were still some staffing issues sort of impacting installations, there or did I Miss did I Miss here that I'm, just curious about the dynamics right now for installing Mako systems.
No Thats correct I think a lot of times when we talk about staffing. We immediately think about just the nursing staffing component, but staffing has been an impact at all different types of areas across the hospital and so with a lot of our larger capital items, we've seen some delays in installations or even just in construction projects.
And that has led to some of those delays in may <unk> was impacted by that during the quarter as well.
Thank you. Our next question comes from true when Arnie.
Morgan Stanley Sir please.
Please go ahead.
Hi, Thanks for taking my question just a.
More of a product question and then I had a follow up but.
You guys highlighted Q guidance and system a power tool, it's kind of a double AOS and I know that they were more limited launches here in 2022, but just given the <unk>.
Macro factors here supply change disruptions I mean does that.
Really saw what we could expect these products to deliver in 2023 with your spine growth or any pull through there with enabling technologies or pricing benefits.
The power tools.
Yes at this point I would say Theres no. We're obviously not giving guidance on 2023, but in terms of those products.
Still early Q guidance not in there is still is still in the approval process.
So we still have a ways to go there but in terms of the next power tools also similar we're still early in terms of getting that out from a launch standpoint next year. So at this point no update in terms of major impacts our expectations to what it might have on our on our numbers for next year.
Okay. Thank you and then just with insignia I think.
It was also highlighted that.
Instrument tray its more attuned for Asia.
ASC usage, so is there anything that youre seeing.
With the recent launch that.
Really shows that ASC or being receptive or is just the general environment may be masking any any uptake there of the new platform at ISC is thanks.
Yes, so what I'd say is Sydney alone.
<unk> is ideal for direct anterior which of course is very popular in the ASC, but not just in the ASC is also in the hospital and even though we only launched it very recently the feedback has been incredibly positive.
So we have a great design for the product surgeons are finding it terrific broaching the offsets the sizes.
The fit that it's really delivering on what we thought so we couldn't be happier with the launch at least this initial phase of the launch and this will be a tailwind for our business.
And it will actually pick up as more and more sets are deployed in the field, you'll see it actually accelerate through Q3 Q4 and into next year.
Thank you.
We now have Joshua Jennings of Cowen. Please go ahead I think in your lines for sure.
Thank you and I appreciate you taking the questions.
Just two.
One on just the natural margin tailwind Glenn you talked about earlier in the year.
Potentially driving some some operating margin expansion at.
At least by by the fourth quarter can you just maybe.
Maybe frame that up a little bit better just thinking about or you're not guiding to upside to the 60% range, we're getting to the top but getting through the top end of the revenue guidance range and just how impactful that natural margin tailwind from increased volume.
B any quantification, probably hard but we'd.
It would be helpful or even Directionally and then just was curious.
Okay I have an impression on just the strong recovery in knees and hips versus versus spine spine is recovering, but not as not as quickly.
Any any thoughts on just why spine market recovery of volume recovery is a little bit slower than knees and hips. So far in 2022, thanks, Tim Thanks for taking the questions.
Yeah, Josh I think I heard your question right is.
What kind of op margin lift could we get out of <unk>.
Sales performance sits above the 10% so.
A couple of things and anything that we delivered above the 10% would still have that kind of gross margin and inflation overhang. So we would feel that pressure, but you are correct that there is a natural operating expense leverage that encourage that we incur when we sort of pierce through some of those larger double digit growth.
Items, so I expect that you would see delivery.
At the op margin level and.
In excess of where you're seeing us now the 22% roughly so it would be accretive to that for sure.
On your second question around the spine market versus hip and knee market. Even if you go back to pre pandemic.
The hip and knee market was growing.
On a dollar basis was growing faster than the spine market.
Spine market did have some elements of the more acute procedures that were less deferrable and so they didn't decline nearly as much as to the hip and knee business did so not as much of a decline and then therefore not as much of a pickup in a market that frankly hasn't been historically growing quite as fast as hips and knees. So those are the.
The dynamics I think that you're seeing play out here, we are delighted with our performance certainly in our if you look at our knee business and in hips.
Just this quarter, we were leading the market in knees for a longtime Mako has been enormous driver our cement less knee procedures or roughly one out of every two knees in United States are going into some endless. So we have a real competitive advantage that you're seeing play out with our knee number but excited that they are hip number is now moving up as well, but I'm not surprised to see those growing.
Then the spine business will have to see when everyone else reports, how the markets play out but to me, it's not that surprising.
Thanks, Kevin appreciate it.
We now have a question from Danielle <unk> from SBB Leerink. Please go ahead, when you're ready Danielle.
Good afternoon, everyone. Thanks, so much for taking the questions and just a quick question and I'm not going to ask about inflationary pressures per se, but what I am going to ask is the supply constraints that you saw if theres any way I know theres a lot of balls in the air as far as trying to nail down.
The different impacts to the topline in the quarter between Covid and supply constrains things like that but whether you can quantify even just directionally the impact from the supply constraints that you did see in the quarter and then I have one follow up on the backlog.
Yes, no nothing nothing that we're going to specifically quantify with regard to that I mean, we still had pretty strong growth in our med surge businesses, which are primarily our capital businesses are but just know that there was impacted in that that those those sales as a result, as we mentioned from electronic components.
Standpoint, primarily in the medical the medical business as opposed to some of the others, but not something that we're going to quantify it.
Okay I appreciate that and then just kind of commentary on the backlog. So the question I have there is if theres still backlog being worked down in such a meaningful way.
Impacting the referrals changed at all and I guess, what I'm getting about is getting at is how this impacts sort of midterm growth once we're through the acute COVID-19 period.
I'm trying to think about hospital staffing issues and how all of this reconciles and what this means for really midterm gross less near term. Thanks, so much yet.
No I think if I understand your question correctly.
The way to think about this is we've had 24 months of irregular activity with regards to these procedures and so throughout that time period, we've seen that backlog quite frankly, just grow I mean, the number of people that haven't had procedures done.
As a result, whether they are currently in the funnel whether it had been deferred from the funnel and then as we keep going forward.
Part of what we're going to continue to see is we're going to see new patients entering that funnel. So I don't think theres going to be a slowdown at all and that's why we were saying with this backlog is not something youre going to see pronounced in any one particular quarter or month. It is going to be something thats going to be a longer term work down that we're going to see from from people.
Funneling through the whole process. So I think youre going to just see that growth rate continues to be pretty.
Steady and growing.
Okay. Thank you.
Thank you Danielle we now have the final question on the line from <unk>.
Uhm of Chile.
Please go ahead, when you're ready Richard.
Hi, guys. Thanks for squeezing me in here. So just the first one going back to some of the pricing commentary I was wondering if you might be willing to comment a bit by care setting.
The reason I asked I was trying to think through some areas, perhaps for strikers better positioned to take breakeven even in other med tech companies and their potential or you're.
Competitive advantage in the Afcs immediately came to mind I'm just wondering if if that's one of the one of the areas where.
Potentially there might be.
The possibility renegotiated contracts in particular.
There are going to offer some opportunity there.
Yes look if given the inflationary environment as <unk> mentioned earlier, we are obviously going to look at pricing actions across our portfolio in some places is going to be easier than other places.
Given the nature of our contracts, but for competitive reasons, we're really not going to disclose the tactics the strategies, which products every quarter you see we do report our price youll get to see the overall impact, but but it's not something we're really going to get into on this call.
Okay Fair enough and then just maybe one last one I think you said you're steering towards the lower end of earnings guidance.
For earnings per share.
And you said that.
This assumes that at the low end at least assumes that supply chain pressures persist throughout the remainder of the year, but you also said that you expect some improvement as you move into <unk> I just want to make sure I'm reconciling those two comments appropriately.
Yes, I think I think you you're conceptualizing them right.
I think what we're trying to communicate is.
In the short term, how we saw inflation impacting us in Q1, we will feel similar inflation in Q2.
We expect the environment to improve which also means that we also expect to start delivering more of the capital that's been in our order book in Q3, and Q4 plus will feel the impact.
Of a lesser comparable for one on the top line and will also feel the impact of that sort of back procedural backlog starting to free up.
Which from a mix standpoint also helps helps the bottom line.
Thank you.
Thank you there are no further questions and I would like to hand, the call back over to Kevin. This is final remarks.
So thank you all for joining our call we look forward to sharing our second quarter results with you in July .
<unk>.
Thank you. This does conclude today's conference call you may now disconnect your lines.
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