Welcome to the first quarter 2017 Stryker earnings call. My name is Crystal and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Following the conference, we will conduct a question and answer session. During that time, participants will have the opportunity to ask one question and one follow-up question. If you would like to ask a question, please press star then one on your 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 results to differ materially are discussed in the company's most recent filings with the SEC. Also, the discussions will include certain non-GAAP financial measures.
Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release that is an exhibit to Stryker's current report on Form 8-K filed today with the SEC. I will now turn the call over to Mr. Kevin Lobo, Chairman and Chief Executive Officer. You may proceed, sir.
Welcome to Stryker's first quarter earnings call. Joining me today are Glenn Boehnlein, Stryker's CFO, and Katherine Owen, VP of Strategy and Investor Relations. For today's call, I will provide opening comments followed by Katherine with an update on Mako. Glenn will then provide additional details regarding our quarterly results before we open the call to Q&A. Our Q1 sales performance underscores the strength of our businesses with organic sales growth topping 8%. We had one extra selling day, which contributed approximately one percentage point of growth. While the sales performance was strong across the organization, MedSurg was the standout, delivering organic growth of 10.8% as new products and sales force execution drove market share gains. The Orthopaedics and Neurotechnology and spine segments were solid in the quarter, posting organic sales gains of 7.2% and 5.3% respectively.
On a geographic basis, growth was 7.6% in the U.S., while OUS delivered gains of 9.9%. OUS growth was driven by strong performances in Europe, Canada and Australia. Acquisitions contributed roughly 10.6% to Q1's growth, recognizing the previously discussed factors that impacted Physio's first quarter performance while lingering recall challenges limited Sage's growth. We remain confident in the underlying strength of both Physio and Sage and expect them to be back on track for the balance of the year. Our particularly strong top-line performance allowed us to make key strategic investments and sustain healthy R&D spending. Adjusted per share earnings increased approximately 19%, topping the high end of our range at $1.48 per share. Looking ahead, our Q1 results reflect strong momentum and support of our ongoing strategy of investing in focused sales teams, internal innovation and acquisitions.
We are highly confident in our ability to deliver on our full-year targets and once again grow sales at the high end of med tech with leveraged earnings. With that, I will now turn the call over to Katherine.
Thanks, Kevin. My comments on today's call will focus on Mako. During Q1, we installed 18 robots globally, of which 11 were in the U.S. We also continued to upgrade existing robots in the field, a process that is ramping nicely and we expect will continue through 2018. As many of you on the call are aware, following a highly focused, limited launch, we initiated the full commercial release of the Total Knee at last month's AAOS meeting. Since the launch, we have trained over 200 surgeons on the TKA application at roughly 90 different locations. We have 40 training locations in the U.S. with another five OUS, which is helping drive volumes of Mako TKA procedures which are accelerating monthly. We remain focused on ensuring a highly successful Mako TKA launch with outcomes that we believe will benefit our customers and patients.
The feedback from surgeons has been very positive. We believe this underscores the methodical approach we took as part of the limited market release in order to optimize the user experience. For those of you at the recent AAOS meeting, the excitement around the Mako TK application was apparent at our Mako surgeon event, which was attended by 1,600 healthcare professionals, many of whom also attended the 25 Mako TKA demonstrations conducted over the course of the academy meeting. We believe the excitement around the TKA application will be evident in our knee market shares, which while already outpacing the market, we continue to expect even greater share gains as we exit 2017. With that, I'll now turn the call over to Glenn.
Thanks, Katherine. Today, I will focus my comments on our first quarter financial results and the related performance drivers. We have provided our detailed financial results in today's press release. Our organic sales growth was 8.2% in the quarter. As a reminder, Q1 included one more selling day, which has the impact of adding roughly 1% in growth. Keep in mind that the selling days generally do not have an impact on the performance of our capital businesses. Pricing in the quarter was unfavorable 1% from prior year, while foreign currency had an unfavorable 0.4% impact on sales. Both U.S. and international sales continue to demonstrate strong momentum with first quarter organic growth of 7.6% and 9.9% respectively. Both geographies benefited from the extra selling day. In the U.S., there were strong performances across Orthopaedics, MedSurg and Neurotechnology.
International sales growth demonstrated solid gains in Europe, Canada, and Australia, and benefited from favorable emerging market comparables. Our adjusted quarterly EPS of $1.48 increased 19.4% from the prior year, reflecting strong sales growth
accretive acquisitions, operating expense control, and the benefit of the change in accounting guidance for tax benefits from certain stock compensation expenses now included in our tax provision. Our first quarter EPS was negatively impacted $0.04 by unfavorable foreign currency exchange rates. I will provide some highlights around our segment performance. Orthopaedics delivered constant currency growth of 7.8% and organic growth of 7.2%, including organic growth of 7.4% in the U.S. This performance was highlighted by positive performances in knees at 7.2% and trauma and extremities at 8.7%. The primary drivers of performance in the quarter included strong demand for our 3D-printed products, our foot and ankle portfolio, and our Mako platform. Orthopaedics International delivered organic growth of 6.8% with solid performances in Europe, Canada, and Australia.
MedSurg continued to have strong performances across all businesses in the quarter with constant currency growth of 36.6% and organic gains of 10.8%, which included a 9.6% increase in the U.S. Instruments had a good performance coming off a strong order book in Q4 with U.S. organic sales growth of 7.8%. This included continued momentum related to its Neptune Waste Management business. Additionally, Instruments also shipped initial units of its newest power tool product line, System 8. Endoscopy delivered U.S. organic sales growth of 14.3%. This reflects strong demand for its video platform, booms and lights, and sports medicine products. The medical division had U.S. organic growth of 6.4%, driven by its core bed, stretcher, and power cot products. As discussed previously, Physio's results were impacted by a tough quarterly comparable that included the legacy company's fiscal year-end. As such, Medical's Physio business was down 18% on a comparable basis.
Medical's Sage business grew 3%, which was below our expectations and primarily related to the ongoing recovery from last year's product recall issues. This resulted in some interruption of supply to customers. During the quarter, Sage continued to work through resupplying these customers and anticipates a full recovery by the end of the second quarter. Both Sage and Physio acquisitions anniversary in the second quarter, and we continue to anticipate that they will be accretive to our earnings as previously guided. Internationally, MedSurg had organic sales growth of 15.7%, which reflects strong European and Australian sales and some easing of the MedSurg comparables in China. Neurotechnology and Spine had constant currency growth of 7.7% and organic growth of 5.3%. This growth reflects continued strong demand for our neurotech products, offset by softness in our spine business.
Our U.S. Neurotechnology business posted growth of 9.7% for the quarter, highlighted by continued strong demand for our ischemic stroke products, CMF products, and our neuro powered instruments. Our Spine business in the U.S. continued to see the residual impact of supply issues. We expect some easing of these issues in the second quarter. Internationally, Neurotechnology and Spine had organic growth of 9.8%. This performance was driven by continued strong demand for our Neurotechnology products in Europe and Asia. Now I will focus on operating highlights in the first quarter. Our adjusted gross margin of 66.5% was down 150 basis points from prior year quarter, but up 20 basis points sequentially from the fourth quarter of 2016. As compared to the prior year first quarter, gross margin was unfavorably impacted primarily by acquisitions, as well as business mix and foreign currency.
Our adjusted SG&A was 35.8% of sales, which was 160 basis points favorable to the prior year quarter. This improvement reflects favorable leverage from business mix, including the impact of leverage from acquisitions and continued focus on our operating expense improvements through our Cost Transformation for Growth program. This favorability is primarily offset by continued planned investments in our CTG program, our ERP project, and certain expenses related to launching our Mako TKA platform. R&D spending at 6.5% of sales continues to reflect our commitment to innovation. In total, adjusted operating expenses were 42.3% of sales, which was 150 basis points favorable to the prior year quarter. With the strong top-line momentum, we anticipate continuing to make investments related to CTG and Mako in the second quarter as we execute these programs to drive longer-term share growth and leverage.
In summary, our adjusted operating margin was 24.2% of sales and essentially flat to the prior year quarter. Our operating margin reflects good leverage offset by key investments related to driving future operational savings and product growth platforms. We remain confident in our ability to deliver on our full-year commitment of driving 30 to 50 basis points improvement in our operating margin. Lastly, I will provide some highlights on other income and expense. Our other expenses increased primarily due to higher net interest expense associated with increased acquisition-related borrowings that were not outstanding in the prior year quarter. This is partially offset by increased interest income. Our first quarter adjusted effective tax rate of 15.3% reflects an underlying operating tax rate of 18%, offset by a 2.7% benefit related to the adoption of the changes in accounting for stock compensation expenses.
As a reminder, the first quarter includes the bulk of the benefit of this accounting change. Moving forward, we would anticipate an effective tax rate closer to 17%. Focusing on the balance sheet, we continue to maintain a strong position with $3.3 billion of cash and marketable securities, of which approximately 85% was held outside the U.S. Total debt on the balance sheet at the end of the quarter was $7.2 billion. Turning to cash flow, our first quarter cash from operations was approximately $151 million. During the quarter, we completed a $230 million share repurchase, which will offset the impact of dilution in 2017. Turning to Q2 guidance, we reaffirm our expectation of organic annual sales growth to be in the range of 5.5%-6.5% for 2017.
As a reminder, Q2 and Q3 will have one less selling day as compared to 2016, and Q4 has the same number of selling days. For 2017, we reaffirm that our adjusted net earnings per diluted share will be in the range of $6.35-$6.45 for the full year. For the second quarter, we anticipate adjusted net earnings per diluted share in the range of $1.48-$1.52, which includes the aforementioned investment, foreign currency impacts, and the impact of the accounting change for stock compensation. I will now open up the call for Q&A.
Thank you. We will now begin the question and answer session. If you have a question at this time, please press star then one on your touch tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. As a reminder, callers will be limited to one question and one follow-up question. Our first question comes from David Lewis from Morgan Stanley. Your line is open.
Good afternoon. Kevin, one for you and then maybe one on Mako. Kevin, just thinking about the strength in the first quarter, obviously even adjusted for the selling day, your organic growth is in excess of the top end of your guidance range for the year. Can you just talk about how you see the pacing for the balance of the year? Is there any factors you could point to that would drive deceleration based on this sort of very strong start to the beginning of the year? Then I'd have quick follow-up.
Sure. Thanks, David. After Q1, we are obviously very happy with how our businesses have performed and the momentum in the business that we have. Keep in mind, as Glenn mentioned, we have one less selling day in each of the next two quarters, and we did start out the year with higher top-line targets and a tighter EPS range than we did in the prior year. At this point, we feel great about the guidance we have out there. Let's see where we are at the midpoint before we think about adjusting our ranges. I would say there's nothing out there that I'm worried about. The business momentum is very strong across our portfolio.
Okay. Kevin or others, just thinking about Mako post AAOS. Our sense is that went at or better than your expectations. How would you characterize sort of post the meeting, training backlog of systems or receptivity, and are you still as confident you were before that we start to see some share movement towards the latter half of this year? Thanks so much.
Yeah. Thanks, David. I would say absolutely the double AAOS launch really probably exceeded our expectations, 1,600 healthcare professionals at our Mako event. More importantly, I think the interest around the demonstrations and follow-up from surgeons who wanted to get better educated and understand. I'm really pleased with the robots that we installed in the quarter with that same sales force out upgrading systems in the field for the Total Knee application. We feel really good about the rollout, the pace we're on. We've tried to be very methodical in approaching the full commercial launch, but with 40 training sites and over 200 surgeons trained and the volumes building monthly, we feel really good about the launch and the rollout for the year.
Yeah, David, I'd just add our orthopedic team did a spectacular job at the AAOS meeting. I even had tremendous feedback from surgeons from outside of the U.S., from Asia, from Europe, I think you're going to see Mako pick up around the world. Obviously the U.S. is going to be the biggest market, but as you saw, even in the first quarter, we sold quite a lot of robots outside of the U.S. The meeting was a huge success. We feel very bullish about the TKA application with Mako.
Thank you. Our next question will come from Mike Weinstein from J.P. Morgan. Your line is open.
Thanks, good afternoon, guys. Let me start with just one Mako question, because I know you're not going to disclose the number of system upgrades that you're going to do on a quarterly basis or the percentage of your installed base that is upgraded, that's probably the metric that is most interesting to us. Can you give us some insight into where you think you are relative to your plan at this point, or your expectations going into the year on the percentage that you have upgraded at this point?
Yeah, thanks, Mike. We feel really good about where we are. We're pacing. We started doing the upgrades in the fourth quarter. They're continuing to accelerate sequentially. We think the process, the vast majority of those robots in the field are going to get upgraded, that's a process we think will take us through next year. Part of the challenge is honestly bandwidth, because we have the same capital sales force that we're trying to expand, they're doing the upgrades, they're doing the new installs, it's managing the demand out there. We feel great about the momentum we're seeing, the level of interest, we would expect those upgrades to continue to build.
Okay. The commentary on different parts of the MedSurg business, I was hoping you could just spend another minute on it. A, on the plus side, I was struck by how strong the Endo business was this quarter, both U.S., internationally, it was exceptionally strong. I think we have somewhat a good understanding of why that is. B, I think the comps for Physio-Control were harder, I think, than the street necessarily appreciated. That was a bit more challenging. Could you just level set expectations on Physio-Control after this quarter?
Yes. You're correct on Endo. We're in year 2 of the 1588 launch, as you've heard us talk about before, you know well, those tend to be a multi-year launch, Q2 is typically a very strong year. They're also seeing very good momentum with booms and lights and the sports medicine business, which continues to see really nice growth. Smaller base, really pleased with the performance there. Physio, yes, we had talked previously about the difficult comps, given a really robust first quarter of a year ago, compounded by the fact that it wasn't part of us, that was their prior fiscal year-end. As you know, capital businesses tend to be the strongest in the fiscal year-end. We did expect this quarter to reflect those trends.
We feel really good about the momentum in that business, as well as Sage, which we also expect to be back to a normalized run rate in Q2. It's really limited to a Q1 event that was much more to do around the comparisons as opposed to anything underlying in the business.
Thank you. Our next question comes from Robert Hopkins from Bank of America. Your line is open.
Great. Thanks. Can you hear me okay?
Yes, we can.
Oh, great. Good afternoon. Congrats on such a strong start to the year. I just wanted to continue that line of questioning on Sage and Physio. Do you guys still expect at this point the same kind of EPS accretion that you talked about previously and for these deals to also be accretive to growth?
Yeah. Bob, as we look at the forecast for both of those businesses, first of all, as Katherine explained, we did anticipate that Physio would be down just given the comparable in prior year. Sage maybe is ramping a little bit slower than we had thought just because of the product recall and getting that product back to customers. For the full year, we're still committed to the guidance we provided of the $0.15-$0.18 per share, and the growth will be accretive for the full year when we get to the end.
Okay. For my second question, just to stick with Mako and kind of expectation setting. Given that you're providing a net number, how should we think about that over the course of the rest of the year? Should we think about it in terms of steady year-over-year improvement as far as the net number? Because obviously, that's a number that's going to get a lot of scrutiny. I think you placed 86 last year. Is it reasonable to expect a pretty nice uptick this year from a net perspective? I was wondering if you could just sort of set expectations for that net placement number that you give us.
Yeah. I think we haven't guided to a robot number. I think you should assume while the net number will grow year-over-year, it won't be at the same pace that you've seen from a growth rate perspective as the base has gotten a lot bigger. Also keep in mind that's only part of the story now. While we'll continue to report like this quarter, the 18 robots installed, just as importantly is that sales force out there doing the upgrades of the fleet, which as you know, easily exceeds 300. It's the combined force of that, which is all recorded in that other recon revenue line, but it really is both of those.
Yes, there'll be year-over-year growth in robots installed, on top of that, really driving a lot of the power of the ability to take market share gains, is the number of installations and upgrades that we're doing.
Just to add, Bob, I think we're really encouraged by the knee growth rate. As you recall, last year, we had a very strong first quarter in our knee business, on top of that, we grew very well again this quarter. Our knee business has had multiple quarters in a row of growing higher than the market, and we expect that to continue.
Thank you. Our next question comes from Rick Wise with Stifel. Your line is open.
Good afternoon, everybody. I want to return to the knee growth as well. You said, obviously, knee growth, knee share already outpacing the market, and you expect more. Just looking at it worldwide numbers, the first quarter up 7.2% against an easy comp, very much in line with fourth quarter growth. When we think about it, is 7% plus, is that the kind of growth we should be thinking about the franchise as we look at for the rest of the year, even though you have a tougher comp in the second quarter, given some of the momentum you're talking about, Kevin?
I'm not sure the comp reference that you're making, Rick, because if you look at last year's first quarter, our knee business in the U.S. was 9% growth.
Okay. I'm sorry. Must be looking at the wrong number.
Yeah, if you're looking at 7.4%, we grew that off of a 9% in the prior year.
Right.
We're feeling great about the knee business. It's gaining momentum. Really, once the Total Knee, really at that application and those upgrades take hold and the surgeons have a good experience, that's locked in market share gains. The more surgeons do and the more that they enjoy that procedure and see the benefits of that procedure, that becomes a locked-in market share. We expect the momentum to continue, and we had a really outstanding first quarter, if you consider that comparison.
Exactly. You talked about making more Mako investments. Maybe help us understand what that's going to encompass, specifically, I think you said in the second quarter. Obviously, you understand the continuing investment in sales force and upgrade and training, is there anything over and above that we should be thinking about?
No. As Glenn referenced, given the strong start to the year momentum we're seeing, there was an opportunity to make some strategic investments in a few areas, CTG, ERP, that had been anticipated, as well as Mako, as we've been really pleased with the rollout, there's obviously always opportunities where if there's investment dollars available that can help drive longer-term growth, want to take advantage of those. Nothing I'd call out in specifics other than really supporting the overall Mako TKA launch.
Just accelerating some of our spending plans. We obviously have a commitment to margin expansion, operating margin expansion for the full year. We're still committed to that.
We had the chance to accelerate some of that spending to really get behind the launch, so far, we're extremely pleased with the way the launch is going.
Rick, keep in mind that as we described our CTG plan and we described our operating margin improvement targets, we said at the analyst meeting last year that it would be 30 to 50 basis points, but in the earlier year it would be closer to 30 because of these types of investments that need to be made.
Thank you. Our next question comes from Matt Miksic from UBS. Your line is open.
Hi. Thanks for taking our question. I wanted to talk a little bit about spine, maybe some of the efforts that you're putting in place there in terms of your product line, in terms of the sales force. Just what has been effective that you've found in terms of improving the growth rate of that business? How sustainable is that? Then I also, apologies, have to ask a question here about Mako, but I'll start with spine. Thanks.
Okay, sure. Really the biggest part of our growth story in spine has been our Tritanium, our 3D-printed interbody device, which was a limited launch last year, and that's really accelerating. We're pleased with that. We have a number of new products that are going to be 3D-printed that will be launched over the course of this year. We expect that to accelerate our growth. We also are bringing a couple of products back on the market that were off the market for almost the whole year last year. Those are just starting to take hold. We actually expect our spine business to improve over the course of the year, this quarter being a little bit softer than what we will experience in the next few quarters.
That's great. On Mako. I guess one of the things I'd love to understand, I've heard your comments about back end, back of the year, kind of maybe visible share gains in knees in the U.S. driven by the launch. Can you talk a little bit about maybe some of the dynamics of share or performance of these accounts as you upgrade them, versus as you, say, place a new system with the Total Knee in place? What are those accounts like? Maybe help us understand the dynamics of how those two develop as examples. That'd be very helpful.
Well, thanks. Each account has its own story. It's kind of like the all politics are local discussion. Certain accounts, you'll have surgeons that'll quickly adopt and convert most of their procedures to robotic, other surgeons that'll maybe be doing the robotic surgeries on a Friday and if they're a high-volume surgeon and maybe doing the normal procedures on their Monday and Wednesday. It really varies greatly, and it's very early in the launch. We're really not at a point yet where we could sort of characterize them for you to say, well, a competitive robot takes X amount of time to get to max penetration. We're gathering all of that data, in future quarters, we'll be able to characterize that more clearly. Today, it's really each account has its own story in terms of how it's scaling.
What I can tell you is we're extremely pleased. Where we're placing robots, they're becoming productive, we're obviously tracking all of those metrics, it's a little early yet to give you more insight.
Thank you. Our next question comes from Matthew Taylor from Barclays. Your line is open.
Thanks for taking the question. Excuse me. I had two questions, really. One, I just wanted to see if you could give any kind of color on why your pricing was a little bit better this quarter, if you could give any color on the different segments or if you saw any meaningful change. We'd just love to hear about that.
Sure, Matt. Price for the quarter, I will say, was not as bad as we initially anticipated. As we think about trends for the year, price is heavily impacted by mix and geography. Just given that we only have this one quarter and that we did have a mix that was skewed a little more towards MedSurg, which provided some slight favorability. At this time, I'm not willing to declare that this is a trend for the whole year. We won't revise our pricing guidance.
Okay. Sort of underlying some of the issues that you called out with Physio and Sage, the MedSurg business had a pretty solid quarter. You did call out in your comments core growth in the beds and cots. I was just curious kind of what you're seeing in the capital environment as it relates to those lines and some of the other instruments that you sell. It seems like things are pretty healthy. Is that a fair characterization?
Yeah, I think we viewed our capital business, and I would stress our capital business because we have a different mix than others, as remaining healthy. There's been no real change, the environment has been healthy for some time. We're in a strong product cycle, as you see in endo with the 1588 and now with the launch of the System 8 within instruments. These are upgrade cycles. It's something our sales force knows really well how to do, that replacement cycle. Overall, we feel good about the capital environment. Haven't noticed any real changes in those trends versus prior quarters.
Yeah. I'm really pleased with the medical team. The core medical business grew double-digit organically on a global basis. I think Glenn gave you the U.S. business, internationally grew extremely well as well. They're doing this while integrating Sage and Physio-Control and working through some challenges as we discussed in those businesses. We're really delighted with the core performance in the first quarter.
Thank you. Our next question comes from Joanne Wuensch from BMO Capital Markets. Your line is open.
Good afternoon. Two questions. The first one has to do with emerging markets. The second one, your trauma and extremity business had a wonderful quarter. Anything behind that that you can share with us? Thank you.
Sure. I'll start with emerging markets. Look, we're really pleased with the performance in India and Brazil.
Our China business had good growth, which really benefited more from weaker comps in the prior quarter. We still have more work to do there, including we're in the process of adding a new Chinese leader. Once we start to make some changes in China, we expect that China will be a bigger contributor to our growth. Overall, the emerging markets were no longer a headwind, but certainly, growing sort of roughly close to the overall average for the company in the first quarter. Very pleased with India, very pleased with Brazil. Some of those key markets have been growing very well for us, and, certainly Brazil is a turnaround. India has been a great story for the past four years, and now becoming a more meaningful business. Overall, good news.
We still have a lot of work to do in China to get that business back to where it needs to be. Your second question was on trauma. We really have terrific performance in our foot and ankle business, driving very high growth, very strong double-digit growth, and that was the biggest contributor. Overall, a very strong performance. Trauma, as you know, has been a great business for us for the past four years, and really pleased in the first quarter.
Thank you. Our next question comes from Joshua Jennings from Cowen and Company. Your line is open.
Hi. Good evening. Thanks for taking the questions. First, I just wanted to ask on the comment you made, Kevin, about the international demand for Mako. I don't know if you guys have disclosed this historically, but can you give us an idea about where you have approvals and then what the update is in terms of a Total Knee indication approval in different territories?
Outside the U.S., and I would underscore the U.S. has been obviously the main market, Australia has been a very healthy market for robot placement, and they have the TK approval. We have approval for that application in Europe, but it is still very early, so I would not assume a big contribution there. I think you really should think about the U.S. and Australia driving most of the momentum as it relates to this year.
We do have a smattering of Makos across Southeast Asia, across different European countries. They do not all yet have the TK, and we are going to be very measured about the Total Knee launch. As we implement those, we are going to be as disciplined as we are here in the U.S. Tremendous interest, and for us, it is just pacing, making sure we put them in the right sites with the right surgeon champions and go through our training.
Great. I just wanted to follow up, another Mako question. Not to put the cart before the horse, but when you talked about incremental Mako investments, it just rang a bell that there is a curiosity about updates about potential future indications. If you are not comfortable disclosing where Mako could potentially go, any idea in terms of when you might give the investment community an update in terms of your path forward there and indications outside of uni, Total Knee, and hip? Thanks for taking the questions.
I think just given the enormity of the Total Knee market application and the early stages of the launch, you should view our comments around accelerated some of the investment spending. It is all focused around the Total Knee. That is where the organization has their efforts focused. Longer term, we will see what happens, right now, we really have everybody's energies focused around optimizing this launch given the size of the market opportunity and our desire to do it right.
Thank you. Our next question comes from Matt Kahler from SunTrust. Your line is open.
Hey, guys. Thanks for taking the questions. First one on Mako. The other ortho line was very strong, as highlighted, reflecting the robot placements. Was there anything in that line that was kind of one time or maybe related to a bolus of trainings or something like that maybe makes this not sustainable, or you think it could continue on at that level of growth?
No, there wasn't anything one time associated in that number. Keep in mind, it includes Bone Cement, it includes revenue associated with the robots installed, and it includes the revenue associated with the upgrades, as well as some revenue associated with SPS. There's a number of items in there. There was nothing unusual other than the fact that we're installing more robots and doing upgrades.
Got it. Thanks. Just to drill down on an earlier question on MedSurg pricing, where that turned positive in the quarter. What specifically were some of the factors that drove that, and what gives you pause around whether or not that might be sustainable?
I think, when you look at MedSurg, there's a lot of different capital products. They serve a wide customer base, I would tell you that as you look at these deals, they're negotiated over long periods of time for larger capital. I can't say that any one thing pointed to an uptick in price, other than the combination of we felt some really good robustness at year-end, that carried over into Q1. I don't anticipate that we'll consistently be able to deliver a 1% price increase like we did in this quarter for MedSurg. It has been, certainly that's the one segment that is the least price sensitive within our portfolio and has been for some time. That MedSurg leadership team has really done a great job of focusing on price, even in terms of how the sales force is paid.
They're paid more if the prices are higher for certain product categories. It's not a new fact that MedSurg can drive price. It was a little bit more positive than we anticipated in the first quarter, as the mix was very strong in that segment, that's a segment that has been doing a very good job managing price over the past couple of years.
Thank you. Our next question comes from Matthew O'Brien from Piper Jaffray. Your line is open.
Hi, good afternoon. This is J.P. in for Matt. Thanks for taking the question. I wanted to ask about the System 8 launch. Just trying to figure out when that officially launched and maybe some early feedback that you've seen there, how we should think about how that can contribute to the rest of 2017 and 2018.
We just launched in the second quarter here. That'll ramp up as we get into the second half of the year. As you've seen before, when we launched, whether it's a new power tool or a new camera within endo, it typically is a multi-year run as we upgrade and hospitals go through their process of upgrading their fleet. We're really excited about this. This is right in the wheelhouse of what the instrument team does really well since power tools really drive that business.
What I'm really pleased about is, as System 7 started to taper, we didn't really see the drop in growth as we have seen in the past with previous launches. They were able to really make a nice transition from System 7 towards System 8. I think part of that is the Neptune 3 launch has really helped on the waste management side to offset some of the slowdown, which naturally occurs when you're at the end of a product cycle. The instruments team's done a really nice job of holding it together as they prepared for System 8. It's early days yet. So far the feedback's been very positive, but we'll hear a lot more about that in the next few quarters.
Got it. Then one more from me, kind of higher level. You guys have made some good investments in the 3D printing. There's a lot of buzz around 3D printing implants. It sounds like it's going pretty well in your spine segment. Just wondering strategically, where you think you can take these capabilities across your entire portfolio going forward?
Right now we're in the process. We've built an entire building, and we're filling it with 3D printing machines in Cork, Ireland. We have tremendous demand and interest from basically all of our implant businesses for 3D-printed products, and we're really focused on innovation. At this point, all the products that we're launching are really adding innovation, either removing Bone Cement, creating new geometries that don't exist previously. We have a pretty healthy pipeline of demands, and we're scaling it as fast as we possibly can to meet the demand. I'm not going to get into specifics on which products, but we have a very healthy demand, and we're extremely, again, tremendous experience in 3D printing titanium. It's really titanium is the key metal that we're focused on, but tremendous interest from multiple divisions of Stryker.
Thank you. Our next question comes from Anthony Petrone from Jefferies. Your line is open.
Thanks. Good afternoon. Maybe a question just on volumes and the state of the hospital market in the U.S. broadly. Volumes look to pick up sequentially a bit across all of the divisions, but you had the extra selling day. Really, I guess the comments this quarter were mixed. Mixed from HCA, better from Intuitive, better from J&J, mixed from some others. Maybe from where Stryker sits, what are your latest comments on volumes and hospital in general? Then in Mako specifically, can you give us an idea of the foot traffic at the 40 training locations from physicians, and are you expecting a conversion rate of one to one from those physicians to full Total Knee implanters? Thanks.
No real difference in our commentary as it relates to our mix of businesses in hospital volumes. Everything feels and looks very stable, and you can see that with the organic number that we delivered, even adjusting for the extra selling day. Our capital businesses really don't have any impact, whether it's an extra selling day or one less selling day. It really doesn't impact those businesses. Then in terms of the conversion, if I'm understanding the question correctly, do you mean in terms of if there's a robot out there, are they converting to TKA for an upgrade? The vast majority of the robots installed in the field, we believe, will be upgraded to a Total Knee.
I think. If your question was more related to people who are going to one of our training sites, if they have enough of an interest to go to a cadaver training or to go to our training site, we do believe it's going to be a very high hit rate. Because to get to that point, they will already have a certain level of interest. Basically, what we felt at the academy, once they started to understand what Mako really gives them, we believe the conversion rate's going to be very high. Because a lot of people had a preconceived idea that they're really just getting some kind of automatic saw. Yes, the saw blade is one of the features of the robot, but it's clearly not the most impactful part of it.
It's really about how you can balance the knee and make interoperative adjustments and be able to do recuts, and there's all these other features that surgeons really didn't understand. Even those that had been surveyed in the past were expressing their feedback based on some idea of what Mako was. What was great about the academy meeting was they were able to really understand the full value of what it delivers. If that question around conversion rate, we do expect if they're going to go to one of these training sites for a visitation or go to a cadaver lab, we expect a very high conversion rate.
Thank you. Our next question comes from Richard Newitter from Leerink Partners. Your line is open.
Hi. Thank you for taking the questions. I wanted to just first ask about Mako. At AAOS, we heard about some competitive offerings. Smith & Nephew launched their total knee. You had Zimmer, who announced ambitions to get into robotics. I'm just wondering if since AAOS, if you could characterize how the conversations have changed with any prospective customers or anyone that's considering a robot in light of some of these other solutions, and if you could comment at all on the competitive landscape in total joint robotics.
Yeah. Thanks, Rich. Appreciate the question. I would say the conversation hasn't changed at all. We remain focused on launching our Total Knee. We believe the features and benefits of our robot and where we are in both the installed base in the field and actively doing upgrades for an existing application where we've been able to demonstrate the benefits and features of it is a pretty powerful conversation. We've talked about over 40% of the robots installed going to competitive accounts, and that continues to be the trend. There's been no change in the conversation. Really, it's focused around what Mako can do as opposed to background noise about competitive offerings that may or may not come to market.
Okay, great. Then, just a follow-up here on trauma. Some of the smaller spine competitors are starting to get into, or have ambitions to get into trauma. I was just wondering, what could you comment on within that industry? Your growth has been holding pretty steady. It feels like it's a pretty attractive overall market, but are there any trends there that you think could lead to increased competition? If you were to see more players coming in, why or how is Stryker potentially positioned to fend that off? Thanks.
Yeah, I think trauma is a little bit different than if you look at, say, spine. The reason I think it's different is you really need to have a full offering. You need to have a full offering of plates. You need to have a sort of a complete offering if you want to take over an entire account or even to really thrive in a level 1 trauma center. That was our learning. If you remember, for a long time, Synthes was the dominant player in trauma. Everybody else was a distant second. Until we rounded out our full portfolio, once we finished rounding out the portfolio, that's when we really started to take off in our growth about four years ago.
Will some competitors be able to nibble around a little bit here and there with some business? Sure. To be a real meaningful player, having that full portfolio is extremely important. I think that makes trauma a little bit different than some of the other specialties.
Thank you. Our next question comes from Larry Biegelsen from Wells Fargo. Your line is open.
Hi, guys. It's actually Craig on for Larry. Kevin, I wanted to start with you. We've seen a number of large deals in medtech over the last couple of years. I just wanted to get your thoughts on potential consolidation within the space, and if there's any competitive dynamics or the environment that may be driving more of a consolidation of some of the sub-sectors under a bigger company.
What I'd say is that we remain committed to our current strategy, which is to drive category leadership in the segments that we are currently playing in. We're going to continue to do this through a combination of internal innovation as well as acquisitions. As you've seen, this strategy is serving us really well, and we expect that it'll continue to serve us well going into the future.
Okay, thanks. Just as a follow-up, I wanted to ask about when will the results of the DAWN clinical trial be presented? Will it be at the European stroke meeting in May, which I think is the next big meeting? What impact do you think the results could have on growth of the ischemic market?
Yes, it will be at the May meeting, in Europe. We will see the results will be presented. I think it certainly affirms the opportunity here by widening the treatment window, which is obviously one of the challenges with this ischemic patient population. There's still work to be done in terms of building the market awareness, the referral channel, all the points along the treatment paradigm that will take a number of years to really fully realize. It's great when we've got the clinical data to support it, but there's a lot of market development work. That's not new. We've talked about this before, but obviously this type of clinical data helps to drive that process.
Thank you. Our next question comes from Kaila Krum from William Blair. Your line is open.
Hi, guys. Thanks for taking my questions. When you think about kind of the spinal implant market, you're obviously focusing on titanium and 3D printing there, can you talk a little bit more about what inning we're in with those technologies and what's next as far as your R&D pipeline in spine? I guess, specifically, do you see more value in investing in robotic technologies in spine, or are you drawn more towards innovating the implant, either through development or acquisition of a motion preservation disc or expanding the titanium platform? Just trying to understand the long-term vision there.
Sure. For Stryker, I would tell you that we're in the early stages with titanium. Very early stages. We believe that it's going to have broader application. We've had terrific success. We have a claim that it promotes bone ingrowth, which is a really powerful claim with titanium. I would say it's early innings, certainly we only had one product that did very well last year. We're launching more products this year. I think we're in the early innings on titanium. With respect to the rest of our portfolio, I'm not going to get into specifically which products that we have in development. We do have an active R&D pipeline, clearly the areas of less invasive surgery, biologics, those are the areas that clearly have the most potential.
I'm not going to get into specifics about which specific areas we're going to focus on, at least not at this point.
Okay. That's fair. I guess just a follow-up. Some of your spine competitors have commented that volumes were a bit slower in spine in January and February this year, then they saw a pickup in March. It doesn't sound like that's something that you're seeing broadly in your business. Is that something that you've seen in the spine segment specifically? Thanks.
Yeah, we really have stayed away from commenting on month-to-month trend. We haven't found it to be really a good barometer of how a quarter or quarters play out, we're probably not going to get to that level of detail.
Thank you. Our next question comes from Brent Williams from D.A. Davidson. Your line is open.
Yeah, thanks for your time. I just had a question on the CapEx spend through the year. I see a little bit of a pickup this year versus Q1 last year. I believe it was in the guidance that 2017 is going to be up $450. Is that still kind of what you guys are looking at for this year?
Yeah, Brent, we're still targeting that number. CapEx includes spending related to ERP and other systems as well as facilities. As Kevin mentioned, we are spending a fair amount on new 3D printing equipment. Those are kind of the broad categories in there, but we're still targeting the number that we guided to.
Great. Thanks very much.
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.
Thank you all for joining our call. Our conference call for the second quarter 2017 results will be held on July 27th. Thank you.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.