Welcome to
the Second Quarter 2016 Stryker Earnings Call. My name is Andrea, 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. 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 ks 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 2nd quarter earnings call. Joining me today are Glenn Boehnlein, Stryker's CFO Tim Scannell, Group President, MedSurg and Neurotechnology and Catherine Owen, VP of Strategy and Investor Relations. For today's call, I will provide opening comments followed by Tim with an update on our 2 recent acquisitions, Sage and Physio Control. Glenn will then provide additional details regarding our quarterly results before we open the call to Q and A. With Q2 organic sales growth of 6.6%, we continue to demonstrate the strength of Stryker's diversified revenue base, which is allowing us to consistently deliver sales growth at the high end of medtech.
This quarter, our growth was powered by robust performance in medsurgenturotechnology, while Orthopedics was in line. Our decentralized business model is enabling us to drive innovation and strong sales and marketing execution. On a geographic basis, organic growth was led by the U. S, up 9%, while sales outside the U. S.
Were up 2%, which is continuing to be impacted by ongoing challenges in China. Beyond the top line achievement, Q2 was highlighted by strong operational expense leverage that reflects our focus on driving cost transformation across divisions and geographies. As previously mentioned, we have a significant opportunity to deliver greater G and A leverage on a multiyear basis initiatives such as indirect spending, product lifecycle management and the optimization of our IT systems. As we are starting to see the impact from these initiatives, it underscores our conviction of delivering leverage earning gains. Based on our first half performance, we now look for full year organic sales growth of 6% to 6.5% and adjusted per share earnings of $5.70 to $5.80 a share.
I will now turn the call over to Tim.
Thanks, Kevin. Good afternoon. I'm excited about participating in today's call and providing you with perspectives regarding our recent acquisitions of Sage Products and Physio Control. I will begin with Sage Products and reiterate the strategic rationale which drove this acquisition. As we articulated in February, Sage complements Stryker Medical's portfolio of innovative ICU and MedSurg products with disposables targeted at reducing never events.
It also provides access to an important adjacent market that expands our hospital product offerings and improves our mix of single use versus capital products. Sage's approach to innovation focuses on demonstrating superior clinical outcomes, which underscore the benefits of their products driving customer adoption and loyalty. These innovation efforts have resulted in unique and highly trusted brands, which are essential part of nurses' daily interactions with patients and hospital ICUs and MedSurg units. Sage is number 1 in all the segments it serves and we believe that in North America alone, Sage's product address a segment totaling approximately $1,400,000,000 Turning to the financials for Sage, given that we closed the transaction on April 1st, we are able to share a full quarter of sales results. Sage's performance was strong in Q2 with sales growth of roughly 9%.
This performance was achieved while contending with an unexpected supply interruption during the quarter that was one time in nature and has been resolved. Without the supply interruption, Sage's growth in Q2 would have been approximately 14%. Sage's success has been fueled by their commitment to innovation, which has resulted in a long history of successful new product introductions, including the recently launched AirTap product. Using proprietary air assisted technology, AirTap enables caregivers to provide exceptional care by aiding in the turning and boosting of patients while the patients remain in bed. AirTap enhances caregiver safety as it requires 80% less force to boost patients versus the typically used raw sheet.
With respect to integration, plans are underway to expand our manufacturing capacity beginning in 2018 to support expected growth. Moreover, our businesses are working to coordinate activities to accelerate revenue in areas such as key account and brand strategies. Our international focus will begin with Europe where Sage has experienced some initial success and Canada where they have done very well. Beyond these markets, we are working to prioritize countries which value proven clinical solutions that eliminate never events. We are excited by the cultural similarities and positive chemistry between Stryker and Sage and expect double digit revenue growth in the second half.
Turning to Physio Control, I would like to also reinforce the strategic rationale that led us to acquire this company. As we described in mid February, Physio Control complements Stryker Medical's portfolio of innovative and differentiated prehospital and hospital products as Physio Control is the leader in the development, manufacture and sale of defibrillators and monitors, AEDs and CPR assist devices. We are excited by the synergistic benefits and market strength that resulted from the combination of Physio Control with our medical division. Importantly, the vast majority of Physio Control sales call points overlap with our medical division call points. Physio Control holds the number 1 or number 2 share position in every major segment it serves.
We believe that on a global basis, Visio Control's products address segments totaling approximately $1,700,000,000 With Stryker's market leading powered cot and power load lift system, coupled with Physio Control suite of defibrillators, monitors and related products, our solution set is extensive. Our existing EMS franchise has enjoyed tremendous success in recent years with growth significantly higher than the market and Stryker as a whole. VIZIO CONTROL's business has an attractive mix of 60% capital and 40% recurring business compared to our EMS business which is nearly 100% capital. In addition, Physio Control has an impressive engineering competency and a robust pipeline of products that have recently begun to launch with additional product launches slated for the next several years. We expect this refreshed product portfolio and the combination of our organizations to result in continued strong sales momentum and greater profitability leverage in the future.
As a reminder, we closed the Pizzio transaction on April 5. Pro form a Q2 sales grew roughly 9%. On the integration front, our teams are focused on determining design that best serves our common EMS and hospital customers. In addition, Physio has a significant international structure and our medical division is assessing opportunities to drive growth by leveraging Physio's international market knowledge, strength and operational infrastructure. We expect high single digit growth from the Physio Control business in the second half.
With these two acquisitions, the Medical division is now bigger, stronger, better diversified geographically and has more base business. Encouragingly, Medical had a strong organic Q2 growth result while integrating these two acquisitions. This concludes my overview commentary on Sage and Physio Control. Glenn will now discuss our Q2 financials in more detail. Thanks, Tim.
I will
focus my comments today on our financial results and key drivers of our 2nd quarter performance. Our detailed financial results have been provided in today's press release. For the quarter, our organic sales growth of 6.6% exceeded the high end of the range of our full year expectations despite a tough year over year comparison with growth of 6.9% in the year ago quarter. The quarter included 1 additional selling day compared to prior year and consistent with our previous communications. The additional selling day equates to approximately 1% of additional growth.
Pricing in the quarter was down 1.3% from the prior year, trending percent, while international sales posted organic growth of 2%, reflecting continued destocking challenges in China. Our adjusted EPS of $1.39 increased 15.8% from the prior year, primarily driven by our strong top line growth, including the impact from the acquisitions completed in the quarter. Interest related to the recent bond offering unfavorably impacted EPS by $0.05 per share and foreign exchange unfavorably impacted EPS by $0.03 during the quarter. Looking at our segment highlights, Orthopaedics delivered constant currency growth of 4.8% and organic growth of 4.5%. The top line was led by U.
S. Orthopedics gains of 5.9% highlighted by a 9.5% increase in trauma and extremities and a 6.8% growth in knees as momentum continued for our 3 d printed titanium revision cones and our cementless knee products. U. S. Hips posted low single digit growth due to softness in the revision market.
Orthopedics International delivered constant currency growth of 2.9%, led by a strong performance in our European Knee business. Lastly, we placed 17 Mako units during the quarter. Overall, our 2nd quarter results continue to reflect strong momentum across our orthopedics portfolio. Our MedSurg segment's constant currency growth was 34.2%, including the impact of the recent acquisitions of Sage and Physio. Excluding the impact of acquisitions, our MedSurg business posted organic growth of 8.5%.
Our U. S. MedSurg business continued their strong momentum with organic growth of 11.1%. Instruments had solid U. S.
Growth of 8% with strong performance in our power tools business highlighted by double digit gains in our micro power tools. Endoscopy continued its momentum from Q1 with U. S. Growth of 10.8% driven by continued success of our 1588 AIM video platform. Excluding the impact of the Sage and Physio acquisitions, Medical had U.
S. Growth of 16.9% driven by continued performance of its PowerCot products as well as solid performance of our bed business. Internationally, MedSurg organic sales were down 0 point 5% for the quarter, reflecting ongoing challenges in China, primarily related to distributor destocking. We expect this to continue throughout 2016 as we work with our distributors to drive end customer demand and reduce the buildup in their inventories. Neurotechnology and spine posted constant currency growth of 9% and organic growth of 7.5% with continued strong momentum in our neurotech businesses, which increased 14.4 percent while spine was up 1%.
As with our other businesses, U. S. Neurotech growth was robust at 15.6%, which reflects the continued strong demand for our neurovascular products, the Trevo stent retriever and target coil, our neuro powered instruments and our craniomaxofacial fixation products. Our U. S.
Spine business grew 4.8% despite experiencing product supply issues, but continues to see good demand for our newer 3 d printed titanium products. We expect these supply issues to remain into the Q4. Internationally, Neurotech constant currency growth of 12.3% reflects the broader market momentum for the Trevo stent retriever and target coil products. Spine's international growth was dampened by the aforementioned product supplies issues and continued challenges in China. Moving on to general operating highlights, our gross margin on an adjusted basis was roughly flat at 66.2%, down 180 basis points sequentially.
We had another quarter of strong impact from our focus on operational efficiencies including improved productivity and absorption. This was offset by the full impact of our recent acquisitions including certain accounting reclassifications between gross margin and SG and A to align to Stryker policies, sales mix and negative pricing. As for our operating expenses, we continue to focus on internal innovation with R and D spending of 6.4 percent of sales. On an adjusted basis, SG and A for the quarter was 34.9 percent which was favorable by 120 basis points as compared to the prior year. The improvement reflects the favorable impact of SG and A leverage from our recent acquisitions, the previously mentioned reclassification of certain expenses, our sales mix and continued focus on our operating expense improvements through our CTG program.
For the quarter, acquisitions contributed roughly half of our SG and A improvement. Combined, these factors drove a 100 basis point year over year increase in our adjusted operating margin to 24.8%. Lastly, I will provide some highlights on our other income expenses. Other expenses increased due to higher net interest expense related to increased borrowings at the end of the Q1. We anticipate that future quarterly interest expense will be roughly $30,000,000 which is consistent with this quarter.
Our 2nd quarter adjusted effective tax rate of 17.6% reflects the benefits of our global tax structure partially offset by the impact of higher U. S. Based income from our recent acquisitions. Moving on to the balance sheet, we continue to maintain a strong balance sheet with $3,500,000,000 of cash and market hold securities of which approximately 38% was held in the U. S.
Total debt on the balance sheet at the end of the second quarter was $7,600,000,000 dollars Turning to cash flow, our year to date cash from operations was approximately 671,000,000 Finally, as we have previously announced at the end of Q1, we suspended our share repurchases for the remainder of the year. In terms of guidance, based on our 2nd quarter performance, we expect our full year organic sales growth to be in the range of 6 percent to 6.5 percent for 2016. If foreign currency exchange rates hold near current levels, we anticipate net sales will be negatively impacted by approximately 1% for 2016 with negative pricing being in the range of 1.5% to 2%. Lastly, our guidance for adjusted net earnings per diluted share in 2016 now stands in the range of 5.70 dollars to $5.80 for the full year and we expect the Q3 to be in the range of $1.33 to 1.38 dollars And now we'll open up the call for Q and A.
Thank you. We will now begin the question and answer session. Our first question comes from the line of Mike Weinstein with JPMorgan. Your line is
now open.
Thanks. Thanks for taking the question, guys. Just want to get your thoughts on a couple of items. So number 1, understand the guidance update for the year. One of the questions people are asking is just the Q3 is a little bit below where the street was modeling.
So I don't know if as you looked at Street models, if there was anything in particular you thought the Street was off on relative to your expectations. And then second, the mix of growth is a little bit different this quarter if I look at orthopedics and med surg within those different businesses. Maybe there's a couple you want to comment on. There's a few that stick out to me, but I'd just love to get your thoughts. Thanks.
Okay. I'll take the first one. So as we look at Q3, seasonally Q3 is usually our softest quarter. I think if you look at our guidance, it's very consistent with our Q3 guidance that we provided in the past, especially when you look at year over year growth.
And as to the second question, Mike, this is Kevin. I would say that from quarter to quarter, we you see this kind of change at Stryker and we've seen this for the past few years where in the Q1 orthopedics had a more robust performance. This quarter, it was led by MedSurg. From quarter to quarter, we see those variations. But what's encouraging to me is if you look at our growth versus the market, we can achieve it for them very well, especially if you look on a rolling 4 quarters basis.
And maybe just a couple more, Kevin, just to comment on. So the if I look at within different businesses, maybe some that were a bit surprising was maybe International Spine, which you made some comments relative to the orthopedic business. There was some surprises like U. S. Hips was less than what we thought, knees was pretty close.
But there were some relative to what we saw in the Q1, there were some pretty good swings within the business model.
Yes. So, Mike, look, I'll just finish by saying, in China, we've had issues and challenges and we've highlighted those in the past. That affected spine, that affected our endoscopy division, that affected our trauma division. Spine had some product supply issues, which affected both our U. S.
Spine business as well as our OUS spine business. Hips, as you pointed out, was a little softer this quarter, but we've led the market certainly in the U. S. For multiple years in our hip business and it's just 1 quarter. So there's for me no concern there.
We see these changes from quarter to quarter. And as you've seen, the resiliency of our top line quarter after quarter over the past 3 or 4 years has been very steady. So yes, there were a bit of swings this quarter, but nothing that causes me any reason for concern. We have very, very strong divisions across the company.
Thank you. Our next question comes from the line of Bob Hopkins with Bank of America. Your line is now open.
Hi, thanks and good afternoon.
Good afternoon, Bob. Hi, Bob.
So just a couple of things to follow-up on. 1, just a little more color maybe on the U. S. Hips, recognize that you've been strong and it's just 1 quarter. But Kevin, you mentioned that you felt it was a soft revision market.
So you felt like it was there was something going on with the revision market this quarter. So I was wondering if you could just give a little bit more color there. And also now that we're kind of 1 quarter into the CJR, maybe any thoughts from the field in terms of what you're seeing, client reaction, thoughts on how things are developing there? Thank you.
Hey, Bob, it's Catherine. Just a couple of points. I wouldn't look at the quarter and say something particular was going on in revisions versus primary. Overall, it was a bit softer than we've seen. And much like the Q1, it was a bit stronger than we typically see.
But we're not hearing anything from the field, from our customers that suggest something's changed. It really reinforces why you've heard us say over and over, we really focus on rolling 4 quarter trends because we see this quarter to quarter variability that taken as a whole when you look back doesn't mean anything significant in terms of changes in underlying fundamentals. And we're not seeing anything different in this quarter other than it was obviously a weaker than normal quarter versus Q1 being a stronger than normal quarter. In terms of CGR, as you know, it went to effect April 1. We haven't seen any impact.
I think it's simply too early. As you know, there's no penalty until after the 1st full year. So it's just simply too early, but nothing has played out yet in terms of a significant change or impact on the
market. Okay.
And then,
2 other things I wanted to touch on. One was just maybe a comment on gross margin. In Q1, you talked about thinking about 68% for the rest of the year and just would like to understand some of the moving parts that you were highlighting in the prepared comments. And then lastly, as it relates to the deals, sounds like things are going well, Tim. Previously, you guys had suggested that $0.15 to $0.18 of accretion in 2017 a good preliminary estimate.
I was wondering from what you see today, is that still a good preliminary way of thinking about things or is that perhaps a conservative estimate? Thank you.
Hey, Bob, this is Glenn. First of all, if you look at the sequential drop in margin Q1 to Q2 roughly 180 basis points. I mean Q2 was really impacted by mix especially, but not just sales mix, but by adding in the acquisitions. It's early and our acquisitions are off to a solid start, but that's going to impact gross margin for the rest of the year. And it impacted more than just product.
We made some reclassifications to harmonize Sage and Physio accounting practices with our accounting practices. And this essentially shifted some SG and A expenses up to gross margin in order to sort of align them with how Stryker does the accounting. It's pretty common that we do that and we don't get a chance to really see it until we really climb into the integration work. So that's one of the things that came out. And then on top of that, I really just need to reiterate that there's a lot of other things that make our margin move around, not just price, but FX, geographic mix really impacted.
And all of those are pretty hard to forecast to sort of a single point estimate. As I think about for the rest of the year and what you should maybe think about for your model, I think we'll be in the range of this 67% range. But understand that it could trend above or below that based on all those factors that I mentioned.
And Bob, on the deals, this is Tim speaking, the accretion assumptions you cited look good. We're on track and we would expect you could assume those to be good moving forward.
Thank you. Our next question comes from the line of Kristen Stewart with Deutsche Bank. Your line is now open.
Hi. Just to, I guess go back to Bob's question on the accretion from the deal. How should we just think about, I guess that accretion, should we think about that as flowing through? I realize it's still very early compared to think about next year, but should we think about kind of that baseline growth? I know we've talked about this in previous calls or should we think about that as still a little too soon to kind of dial in accretion above what has been generally a double digit kind of baseline growth for you?
Hey, Kristen. I think it's very consistent with how we've messaged before. This is obviously going to be one of the variables that gets factored in as we go through our 2017 budgeting process. But clearly, it's incremental accretion above and beyond the normal earnings power of the businesses as they stand. How much of that flows through to the bottom line?
How much of that we reinvest as we think about the opportunities in front of us? All of that will get factored in and will be evident when we give the range. So I wouldn't want to say it's a one for one just to throw it all on top of a normal earnings number because we have to look at the opportunities for reinvestment recognizing obviously it's also incremental accretion and so some portion of it is likely to play out at the bottom line as well.
Okay. And then just generally on the market trends, I was just curious, from a competitive standpoint now that we've had a couple quarters on which, I guess Zimmer is through with its integration of biomed and we've seen J and J kind of pick up its momentum within hips and knees. I was wondering if you guys could just comment broadly if you're seeing, I guess, what other companies are saying in terms of them getting their momentum back. Any particular changes that have been affecting you and perhaps on the hip side, is this a reflection of some of the other companies getting their steam or is it just simply you feel just the provision market softening?
Yes. I would say again, it's just a quarter that was incrementally weaker versus quarters where it's like the Q1 where it felt stronger, but we couldn't point to any discernible change or inflection point that suggested we had a new higher growth market. The only ones who have reported are us and J and J, so we have pretty limited visibility until everybody else reports, but we're not seeing or hearing anything that suggests that you're seeing some dramatic market share shift. It's generally not how things play out in the recon market. So again, we're not seeing anything that would suggest this is anything different than the normal quarterly variability that we see play out.
Obviously, it's more fun when Q1 and it's incrementally stronger. But again, that's why we focus on the rolling 4 quarters.
Thank you. Our next question comes from the line of David Lewis with Morgan Stanley. Your line is now open.
Good afternoon. Just a few questions, maybe starting with Kevin. So Kevin, just with the extra selling day here in the second quarter and thinking about the easier comps in the back half of the year, By our math, your guidance for the remainder of the year sort of implies stable comp adjusted growth for the back half of the year. Is that just kind of roughly how you see the business stability on an underlying basis into the back half of the year? Or are there chances for acceleration or deceleration?
So David, since the beginning of the year, this is the 2nd time we've sort of moved our range upwards. And we've been delivering very strong growth throughout the year. Yes, in China and even all the emerging markets, our comps will ease in the second half of the year, but we also have some challenging comps in some of our other businesses that were growing very robustly in the second half of the year. So it's a big business that we're managing. And I think if you're growing north of 6% organically while you're integrating acquisitions, I think you're doing pretty well.
We would agree. And then Glenn, I think you've gotten questions on margins. But I think this particular quarter, it's sort of the mirror image of the Q1 where gross is a little weaker, SG and A controls a little better. I know you had some announcements on the ERP integration during the quarter.
Can you just
give us an update on where you are in sort of the ERP planning? And what's the opportunity for savings for shareholders on the ERP? And when we may get an update on that number? And then I have one quick follow-up.
Yes, David. On ERP is one of the things we're focusing on relative to our CTT program. It has several facets. I would say we're in the pretty early stages of our ERP program. Obviously, when you're implementing a new commercial global footprint, it's a multiyear journey and we're in the early stages of that.
So we'll definitely keep you guys updated as that project moves forward. I think the more immediate term things to think about are indirect procurement and those parts of the project that really can have more of an impact as we roll forward in the next year. Yes, David, what
we've been signaling on our cost transformation is this is really the engine of being able to sustain leveraged earnings year after year. And so in the earlier years, you're going to see more of that savings coming through from indirect procurement. And in the later years, you're going to see more of that saving from product lifecycle management and coming from the ERP benefits. But I would say it's been a real rallying force for the company. So everybody, all the different divisions of Stryker working on a common system, which is going very, very well and it's a shift to SAP from a company that has really no SAP today.
But I'm very encouraged with the early progress and I'm very optimistic about the implementation.
And then Catherine, just one last quick one here. The Neurotech number, obviously, very, very strong and obviously the driver, partially is the ischemic market. I feel like in the last couple of quarters, you and your competitors have sort of shifted away and they're much more focused on sort of market development from here. I wonder if you could just share with us what specifically is Stryker doing on the market development front to drive that market? And I'll jump back in queue.
Thank you.
Yes, David, we have been for some time been messaging around the market development. But with Tim here, who runs that business, I'm going to pass it over to him.
Yes. There was a variety of initiatives out there where we're simply partnering with systems, healthcare systems, hospitals to drive patient flow to the right centers where they're performing these procedures. It will be a multi year process and hospitals all vary in their level of maturity, but it's a very real and big challenge to get these patients to the right centers. But our efforts surround largely education, trying to assist, trying to ask the right questions, trying to connect people with the right consultants, things like that and make sure their stroke centers are properly operating and they're getting the patients from the ER to the cap or the interventional lab to treat these patients. So it takes many forms, it takes many years, but I think what we're seeing is steady progress chipping away, but it's going to be years years of efforts here.
Thank you. Our next question comes from the line of Rick Wise with Stifel.
Good evening, Kevin, and hello, everybody. Maybe starting off with Mako, in an oblique way, you talked about you had solid U. S. Knee numbers. Where are you in the total knee rollout from Mako?
Is Mako you didn't call out Mako as a positive factor driving knee volumes in the U. S. Is it a factor? Just remind us where you are in those timelines with commercialization and papers and what's next for Mako?
Yes. Thanks, Rick. This is Kevin. So today Mako is not a huge driver because we're really in the knee business just using it for uni compartmental knees. We do have a limited launch and the accent is the word limited.
Just a small number of surgeons who are doing total knees. Early feedback has been very positive, so we're encouraged. But the reason for the limited launch is to make sure that we work out all the workflow and define training protocols and also be able to have some publications and podium presentations. The full launch on the total knee is not until next year. So
maybe turning to Tim and Physio. Tim, you talked about high single digit second half growth for Physio, but you also underscored the pipeline and the products coming. Can you give us any more color on the pipeline? What do we expect? When do we see it?
And is does that accelerate or sustain that kind of high single digit growth pace for Physio? Thank you.
Yes, Rick, I would say it would sustain that high single digit growth rate. I think what I said after the deal was announced was that it would be accretive to Stryker's sales growth rate. And I would expect over the next several years to see next generation products in each of 3 main categories, defibrillators and monitors, AEDs or automated external defibrillators and circulatory assist devices. This market is now turning into a PMA market in the United States. And so these launches will be global in nature and vary in timing by market.
So we're not going to be overly specific about it, but I would say we expect again over the next 4 to 5 years to have a consistent stream of new products which would drive that accretive sales growth out of the physio division versus Stryker.
Thank you. Our next question comes from the line of Chris Pasquale with Guggenheim. Your line is now open.
Thanks and congrats on the quarter. I had a couple of questions on Sage. First, can you give us some more color on the supply disruption in the quarter, what happened there?
On the supply disruption, from time to time, each of our businesses may have some issues. In this case, was one transit in nature. It's over and that's about as far as we're going to go in terms of sharing details.
Okay. And then what's the time line to build out Sage's presence internationally? You talked about a little bit in Europe and Canada initially. With the rest of the business, can you drop those products into your bag internationally and start to see some synergies in the next few quarters? Or is this going to be a protracted process where there are regulatory and tenders that have to go through before you really start to see that?
I think it will be a longer term process. As we've seen with all our international initiatives, it does take time. And so we do have a foothold in Europe and Canada as we talked about. Areas like Australia may be fertile ground, but will take a while. Other areas like Japan will take even longer in terms of regulatory pathways.
So we see great opportunity, but it's going to be a multi year journey for sure.
Okay. And then just one quick one if I could on China. Do you guys have any visibility at this point where inventory levels stand and what's your underlying growth in that market might be excluding these drawdowns? Just to give us a sense of how close we might be to seeing a turn there?
Yes. So what we've been saying now for the past few quarters is we did expect this to be a very soft quarter in China. So it was in line with our expectations. We do expect sometime in the back half of the year that we'll start to reach bottom and that will return to growth. We don't have the precision just based on having multiple tiers of distributors.
We don't have precision to be able to identify that exactly, but you should see signs of improvement certainly, while we exit the year and going into next year. We should bottom out sometime in the second half.
Thank you. Our next question comes from the line of Matt Kuehler with Credit Suisse. Your line is now open.
Hey guys, thanks for taking the question. Just first on the ex U. S. Knee performance, you mentioned strength in Europe. Can you give us any more color around that?
Was that market strength? Are you taking share?
I think at this point, it's just tough to know until everybody reports. We add up the numbers similarly and get a better sense of share shift at that point. So there's nothing specific that we would point to. We obviously have better execution now under our TOM model, which has helped a number of our businesses. But we'll know in a couple of weeks if there's anything more beyond market growth versus share shifts.
Yes. It's important just to note that we have a few of our businesses that are really underrepresented in Europe, our endoscopy division, our instruments division and knees where the market shares that we have are certainly much lower than they are in other parts of the world. When we produce a good growth number, it's really just sort of getting back towards what we would consider our fair share. And it's a very encouraging sign and we're pleased with some of the hiring that we've done in Europe and starting to build that business.
Okay. Thanks. And then just a separate question on neurotech growth is very strong in the quarter, but it slowed versus last quarter sequentially. Can you give us any color on the sub segment growth rates in neurovascular and CMF and what drove that slowdown in growth?
Yes. There would be nothing I would point to. I think as Catherine has talked about in some other areas, the growth rates can vary. It could be based on comps or different countries that did better or worse or what have you. I think if we dug down in the numbers, CMF might be up a smidge and neurovascular down a little, but nothing that would point to any dramatic shift.
I think in general, we've had very, very strong performance. And to me, the good news is that that continues.
Yes. It's important to know all three of those groups. So neurovascular is, of course, the biggest one. The neuro powered tools as well as CMF, they're all double digit growers. And so from quarter to quarter, as Tim mentioned, some are a little higher, some are a little lower.
We had a 20% comp almost in the United States from the prior year and we continue to grow strong double digits on top of strong comps.
Thank you. Our next question comes from the line of Matthew O'Brien with Piper Jaffray. Your line is now open.
Good afternoon. Thanks for taking the questions. Just with Tim in the room, I'd love to hear a little bit more about the MedSurg strength in the quarter. As you're integrating Sage and Physio. Did you get any kind of benefit either from a sentiment perspective from hospitals about adding those businesses?
And then as we think about things going forward on an organic basis, now that you can bundle all these things together, can you still deliver this mid or even upper single digit growth out of MedSurg going forward?
Well, to add a little bit of color, first, I would say we're delighted with the performance of our medical division in the quarter that they delivered strong core growth while dealing with the challenges of these 2 large integrations. Their EMS business did particularly well and they performed nicely in their core bed and stretcher business. Endoscopy is having an excellent year. Their core visualization business is performing exceptionally well with the 1588 camera. The communications business is doing well and the sports business is doing well there as well.
I would point back to a couple of deals we did in 2014. Berchtold and Pivot, these both are kind of in the mainstream now of being integrated and our team is fully in line with our products. So the Berchtold lights, booms and tables have sold well this year. The Pivot products have done very well in our hands as well. And over at Stryker Instruments, this has been a steady strong performer over time.
Their personal protection in fluid waste management businesses were real highlights in the quarter. We do expect a strong second half there as they'll be launching their Neptune 3 fluid waste management system in the coming days. So, I think across the board we were strong. I would also frankly note the sustainability business had a strong quarter and they've done well with recent product launches. And importantly, reprocessed products from Stryker have been embraced as the high quality solution by our hospital customers despite the fact that that's a challenging and difficult market.
I would tell you, no, there wasn't really any sentiment in favor of Stryker as a result of these deals. But importantly, we've had strong execution across the board, good new product flow and we're optimistic about the rest of the year.
Helpful. And then just shifting over to the trauma and extremities business, still solid performance there, but on a 2 year stack basis, that growth rate did decelerate here in Q2 versus the last few quarters. Is there anything going on there competitively of note that could prevent you from sustaining this share taking position you've been in for a while and getting still outperforming the overall market growth rates or should we expect more kind of market growth rates from you and from trauma and extremities?
Well, we feel really pleased with the performance of both trauma and extremities businesses, but obviously the extremities base has gotten much bigger now. So you're looking at more challenging comparables that's still growing very solid double digits. And trauma, we continue to see strong performance for that business as well. There hasn't been any meaningful change. We still feel good about the way those businesses are positioned.
But obviously, the law of large numbers sets in and the comps become more difficult. But beyond that, no, there's nothing we'd really point to.
Keep in mind, we did have an 18% comp in the United States in Trauma. So we had a really huge growth in the prior year and still strong growth. We still believe this is going to be a growth business for the company. So and it's just 1 quarter, it did decelerate a little bit, but certainly a very impressive number nonetheless.
Thank you. And our next question comes from the line of Joanne Wuensch with BMO Capital Markets. Your line is open. Good evening, everybody. Thank you.
In looking at your spine business that accelerated a little bit last year, it seems through innovation and some better execution, but slowed down a little bit this year year to date. How are you thinking about that in terms of internal versus external development?
Yes. You're right. We have invested a lot in terms of the pipeline and launching new products. As we mentioned, we did have some supply disruptions that will continue into the second half here. As you know, we prioritize M and A across all the businesses, but we also invest in those businesses in order to be able to deliver results based on internal innovation and R and D.
So don't think about that business any differently than other areas where we look at opportunities. As you we have BD people in all the divisions looking at targets, but also assessing that around our opportunities to invest internally and grow the business organically.
I would also just I'd just like to repeat that what was mentioned earlier that we did have some product disruptions in the quarter in our Spine business. The underlying business is in really solid shape. I feel great about the leadership team, the new products. We have some supply challenges and that will continue in the Q3 and then it will start to improve in the Q4.
Thank you. And then just to turn back to the gross margin moment, is there a way to peel this apart a little bit to understand the impact of some of the acquisitions or the re categorization may have had on that? Thank you. Yes.
I think if you think about sort of the sequential change from Q1 to Q2, acquisitions in total were roughly sort of half of that change. And that should continue through the rest of the year in terms of the total growth impact on the total gross margin.
So just keep in mind when you get that hit at the gross margin those are also lower SG and A businesses. So part of that big impact, the big SG and A decline as a percent of sales in the leverage is the flip side of that where you're seeing the benefit both from a product mix as well as the reclassifications.
Thank you. And our next question comes from the line of Glenn Novarro with RBC Capital Markets. Your line is now open.
Hi, good afternoon. Two questions on ortho. First, ortho pricing down 2.2 in 2Q versus down 1.7 in 1Q. Is there anything unusual happening there or is that just quarter to quarter fluctuations? And then on robotics, you sold 7 in 1Q up to 17 in 2Q.
Maybe talk about the momentum there with these outright sales and what's the pipeline looking for looking like in terms of robotic deals in the back end of the year? Thanks.
Yes. So to take your the first question, no, I wouldn't read anything into 1.7% versus 2.2%. It's within the normal variability that we have historically seen much like total pricing trending less negative, but still within the range of that 1.5% to 2% that we think about. Yes, we're very pleased with the robot placements and the that we have the early observational studies underway in a limited launch. The order book looks strong.
We're excited about the outlook there as we prepare, as we talked about to go into full commercial launch in 2017.
And then just quick follow-up for Glenn or for you, Catherine, you had the extra selling day in 2Q. Is everything normal for 3Q and 4Q?
Yes. So if you think about it, there was no difference in selling days in the Q1 whether you look at it U. S, OUS, worldwide. 2nd quarter, we had one extra selling day, which equates to 1% impact overall in our businesses. And then Q3, Q4, there's no difference in selling days U.
S, OUS or worldwide.
Thank you. And our next question comes from the line of Raj Denhoy with Jefferies. Your line is now open.
Hi, good afternoon. Couple of questions if I could. So the spine product issue you had in the quarter, perhaps you could provide a little bit more about that. Was that related to the 3 d products that you rolled out or was that
something different?
No. We're not going to get into too many details just for competitive reasons. We do have a supply disruption issue and some supply challenges. We'll work through those in the Q3. We did highlight the Titanium product and a lot of momentum around that and excited about what that product will do for that portfolio, but not going to go into additional details other than say you should assume the impact lingers into the second half of this year.
Okay. And then just for my second question, Medtronic obviously made some noise in June about coming into the orthopedic market. Curious if you've seen anything 1 and 2, if you have any thoughts just around what Medtronic would mean for this market?
No. We haven't seen any impact and they'd obviously be better positioned to talk about where they are in the launch or signing up customers. So today, no, we don't have we don't see the impact. Obviously, we believe in the value of the rep and as well as innovation in this market and we're really going to focus on just that and the Mako Total Knee launch what we think has the opportunity to be truly disruptive in the reconstructive market.
Thank you. And our next question comes from the line of Mike Matson with Needham and Company. Your line is now open.
Hi, thanks for taking my questions. I guess I just wanted to start with Mako and thinking through the total knee full launch next year. I guess to what degree do you think the need to sell the very expensive capital equipment or the robots will kind of limit the growth or limit the rate at which you can take market share in the knee market? Is there anything you can do to potentially speed up those placements in order to capture more of that knee implant share?
Yes. So we're selling the $1,000,000 robots right now. We did 17 this quarter and that's before we've gone into full commercial launch for what we think is the biggest driver of value with the Mako opportunity. And moreover, we've been selling very expensive capital in our med surg businesses for literally years years. So we understand how to sell capital.
It is fundamentally different than selling implants or disposable, which is why we have a separate dedicated sales force. We also have for a number of years now had a Flex Financial Group within the Stryker Organization and our Mako Group is using that to leverage their expertise to offer different options to our customers whether they want to buy outright or lease. And so that expertise that's been developed for a number of years through MedSurg is clearly enabling a different type of discussion with customers and was possible when Mako was a standalone. So we feel really comfortable in abilities to sell capital and the value proposition that's driven by the different applications that will exist on the Mako robot.
I guess what I was getting at is if you came out with a new type of a knee implant, you could walk into an operating room and the doctor could switch to that new implant on day 1. Whereas if they're going to switch to Mako, they've got to convince the hospital to buy a really expensive robot first. So that's going to kind of slow down the ability to take knee market share, is it not?
Yes. To be able to do a robotic knee, you have to buy the robot and it will be a closed system and can only use our knee. So that's part of the value proposition. So we go in and we have that discussion and articulate the benefits here. So this is very different than just simply coming out with a new knee and not having to buy capital.
Yes, that's correct. But it's also very different in terms of the value that we think we'll bring forward and we'll start to get evidence of as we do these observational studies and look at benefits around less tissue disruption, improved alignment, a number of different factors that we think will help support the value proposition.
All right. Thanks. And then just if international growth were to improve, what would that do to your gross margin?
Generally, international flows through gross margin at roughly the same rate that we're experiencing on an average here. So it would roughly flow through about the 67%. It really depends sort of where internationally as well too because we certain emerging markets are better. European pricing impacts are usually higher. But up and down from the 67% that's roughly a good ballpark estimate.
Thank you. And our next question comes from the line of Kyla Crum with William Blair. Your line is now open.
Hi, guys. Thanks for taking my questions. One fine question and then one on the medical business. First, I mean, what are you seeing sort of in the fine market broadly from a competitive perspective? And really, I'm curious about your thoughts on sort of that multiyear robotics movement that now several companies are talking about in that space specifically?
Yes. We really like that many companies are talking more and more about robotics. I think that provides a real good tailwind for Mako. We believe we have certainly the best system with haptics and really terrific intellectual property. And so the more that robotics become a positive word out in the medical technology community with our customers, I think that provides a real good tailwind for us on Mako.
We're not seeing anything new in the spine market. It's a tough market with many competitors. We like our ability to win in the market based on the innovations that we've been bringing forward over the last 2, 3 years. We did have our own challenges, as we've mentioned a couple of times in the call, related to supply disruption, but nothing really new from a competitive standpoint.
Okay. And then just a follow-up on the recent acquisitions in the Medical business. I mean, just looking at the pro form a growth rates you gave us in the quarter, understanding we're obviously early in the integration process. But with that in mind, I mean, how do you expect those pro form a growth rates to trend in the coming quarters? I mean, should we expect modest dislocation before an acceleration or just consistent growth with a typical seasonality in Q3 and Q4?
Yes. I'd say, I guess my answer would be consistent growth in Q3 and Q4 tied to that those numbers we cited of high single digits and double digits.
Thank you. And our next question comes from the line of Larry Biegelsen with Wells Fargo. Your line is now open.
Good afternoon. Thanks for taking the questions. First, international. Kevin, I think you said last quarter emerging markets were down in the high single digits in the Q1. Was it similar in Q2?
And by our math, Europe was also a little soft in Q1. How was Europe in Q2? And what's the outlook there? And I did have one follow-up. I'd say in emerging markets was very similar story in Q2 as it was in Q1.
It was just as bad a quarter. As it relates to Europe, Europe had a mid single digit growth in the Q2. So we were actually very pleased with the Q2 performance. There was a bit a little bit of softness in the Q1 and got back on track in the Q2. That's helpful.
And then for Tim on the ischemic stroke market, could you talk a little bit about how that market's been developing in 2016 versus a strong 2015? In terms of patient numbers treated in the U. S, it was probably up 30%, 40% from about 12,000 to 16,000, 17,000 last year. Is 2016 looking like as strong a year just from ischemic treatment endovascular treatment of ischemic stroke? Thanks a lot.
Yes. I think the growth trends have been similar this year to last year and exactly certainly further to this law of larger numbers and what have you, the growth rates arguably would diminish with time, but it continues to be a very robust market with very significant growth opportunities lying ahead of us.
Thank you. And our next question comes from the line of Richard Newitter with Leerink Partners. Your line is
now open.
Hi. Thank you for taking the questions. I have 2. The first one, just a follow-up on the robotics question and the competitive landscape. Just specifically with respect to spine, can you talk to us a little bit about what your view is of spine robotics technologies in light of recent investments that others are making there?
And then I'm more just thinking, if and when you potentially adapt a Mako solution to spine, how do you what area or in what capacity do you think that could add value to the procedure? And I have a follow-up.
Yes, I think it's just early right now. There's been a lot announced, but there hasn't been a whole lot launched. And so I think we're just going to have to wait and see, do they truly facilitate making the procedure easier or enhancing the outcome. We do believe there's opportunity for robotics when we look at Mako and Spine, but it is not the focus right now. We are completely focused on the opportunity in Recon and particularly gearing up for the total knee launch.
So it's certainly something that we're going to evaluate, but near term it is not the focus.
Okay. Thanks for that. And then just the second one. Someone asked a question earlier about Medtronic getting into hips and knees eventually. I guess my question to you is, Medtronic talked about a risk sharing model.
Can you talk a little bit about what, if anything, Stryker is thinking about doing and potentially going at risk with the hospital in an episode of care payment situation?
Yes, we have done that. We've had our Stryker Performance Solution group within the company now for a number of years. They go at risk. We've got convener status under the prior program. We're able to share risk with customers.
And so this is something that through that SBS we've got a lot of institutional knowledge where obviously we have a very deep understanding around the reconstructive procedure, what the value drivers are through the entire episode of care both in the acute and the post acute setting. So given our long history in ortho, we think we're well positioned on top of the expertise we developed over recent years through our Stryker performance solution to really go in and partner with customers and sometimes go at risk and others construct models that help them maximize the value chain?
We just haven't talked about it a lot since it's not an enormous part of our business, but we have the capability. We're already doing it. And we certainly are having more and more conversations with customers as the CJR rolls into effect.
Thank you. Our next question comes from the line of Josh Jennings with Cowen and Company. Your line is now open.
Hi, good evening. Thanks a lot for taking the questions. I just wanted to follow-up on, Kevin, your comments on Europe and stronger growth in Q2 from Q1. And I think this is the Q2 post annualization of the Transatlantic model initiative. Are you still are you beginning to see more benefits in Q2?
And do you think we should should we think about your European business continue to potentially accelerate or at least getting continue to get receive benefits from this transatlantic model? I just wanted to see if there was an update there.
Sure. So first, rather than just focus on the Q1, I think we had a very I highlighted knees, I I highlighted knees. I highlighted instruments. And even part of our endoscopy division, still has significant growth. So to us, we look at Europe as being a growth market just given our relatively lower market shares, and we see it as a growth market for the next several years.
So regardless of what's going on with Brexit or anything else, our relative low market share creates a big opportunity. And this model that we've implemented, we feel is contributing to the growth that we're experiencing and will continue to deliver high growth or higher than we've experienced over the past decades in Europe. So it continues to be a growth market.
Great. And just had one follow-up on pricing in the press release you called out a 1.3% headwind in Q2. And I was hoping to just get your thoughts on what you're seeing in the market. I know there's a lot of different sub segments within your business. But I guess from a high level, how should we be thinking about the sustainability?
Is this a new level? Is there anything to call out in the quarter? And just what you're seeing out in the market from a pricing standpoint? Thanks a lot.
Yes. If you look in the we break out the pricing and it tends to be more negative in ortho versus med surg, but there's been no real change. Yes, it's trending slightly better or slightly less bad at 1.3 versus the 1.5 to 2 range that we forecast. But we've also seen quarters too far back where it trended a little bit worse and came in north of 2%. So it's within tens of basis points of the range we're targeting and there's so many variables between mix, both product as well as geographic that play in there that I wouldn't view this as some indicative of some new trend line.
I think 1.5% to 2% is a good number to focus on.
Thank you. And our next question comes from the line of Amit Hazan with Citi. Your line is now open.
Hi. This is Lee Preston on for Amit. I wanted to touch on 2 things for mix. It seems like some of your competitors' data for product mix has been pretty much ceased to be a positive tailwind. It's pretty much flat now.
I know you guys used to talk about it in that kind of positive 2% range and it was offsetting price headwinds at about the same level. I realize you might not want to throw out a specific number, but directionally, are we still in the same ballpark of the product mix that we had been in the past several years around that positive 2%. And what are your thoughts on the sustainability of positive product mix going forward? This is for hips and knees
Yes. Okay. So when we report price and I know some companies do it one way, some companies do it the other, we report pure price and then the other number is volume and mix together. So price is negative, pure price negative in ortho and it is offset by volumes and to a lesser degree by mix. There hasn't been a big change in that in recent years in terms of the overall impact of those items.
Okay.
And then I have one follow-up. If you think about CJR next year, do you expect your mix of standard versus premium implants to change at all within your CJR customers for hips and knees?
I think it's early. We'll see what happens next year when they start to go into the penalty phase. Again, we really believe based on all our research that the focus there is going to be much more in the post acute setting since 50% to 60% of the costs lie there for the total procedure and there's tremendous opportunity to take cost out when you look at the post acute setting and the number of patients who get discharged to a rehab facility versus home care. That's where we think the biggest focus is going to be because that's where the biggest dollars are.
Thank you. Our next question comes
from the line of Matt
Taylor with Barclays.
Hi. Thanks for taking the question. Can you hear me okay?
Yes, we can.
Great. I was wondering if
you could just comment reflecting on the first half, just on utilization more broadly. Are you seeing anything different in the U. S. Market that would be a little bit stronger than you would expect or are you all just seeing good execution and product uptake in the Q4?
Yes, there's been no real change in utilization. Obviously, hip utilization was a little bit lower in the U. S. In the second quarter. But no, there has been no overall change in underlying demand across the businesses.
It does vary bit to bit. Obviously, the demand is going to be greater in something like a scheme it. But no, there's been no fundamental change.
And once you get through the drawdowns in China, what kind of growth do you expect for your businesses in that market? Or what visibility do you have on the end market? Right there?
I think we'll have a better sense once we get through that. We're focused right now and really getting to the appropriate inventory level and getting a much better sense of end user demand because there is this distributor layer there. So it's difficult to predict right now. The comps get easier in the second half, but beyond that, we just don't have the visibility to say what true end market demand is going to be. As we start to get better visibility into the channel, we'll be able to share that with you, but it'd be premature right now to throw a number out.
Yes. And the area that's sort of the most hard to predict is capital equipment. I think on the disposables and the implant side of the business, we see that sort of that's still those markets are actually still fairly healthy and we expect that to continue going forward.
Thank you. And our next question comes from the line of Matt Miksic with UBS. Your line is now open.
Hi, great. Thanks for squeezing us in. So I have one follow-up on orthopedic growth from Q1 Q1 to Q2. And I guess when we do the math on J and J's numbers, let's just look at these in the U. S.
And adjust for selling days, just for price, It was a deceleration from Q1 to Q2 and you clearly, A, you've accelerated and B, you're also just growing at a higher rate. But I'm curious, is that feel in the marketplace? Do you like share gains in terms of accounts or mindshare somehow? Or do you get the sense at all that there was what the overall market was like? I know this is an NF2, but just love to get what your perspective is on their deceleration and your sort of call it modest acceleration after adjusting for days?
Yes. So this is really our 4th really good performance in knees, 4th quarter in a row of really strong performance. And we tend to attribute that much more to the launch of our cementless cones and the cementless knee business are really picking up. So our 3 d printed products, we really believe that that's a big part of this. And we also get a bit of a Mako halo impact.
So not specifically just the volume that's coming from our unis, but also wherever we put Makos, we tend to drive a higher mix of our business. So rather than comment on one particular competitor, I would just point out that our business has really picked up and it's been multiple quarters now in a row of strong performance really linked, I believe, to new products and the halo impact of Mako.
Great. And then just one follow-up, if I could. And I have a feeling the answer is going to be it's early around bundled payments. But speaking of folks in the field and working at some of these hospitals either through BPCI or starting to consider how to tackle CJR, there is some thinking that there are centers that are just going to look at this and say, we don't do enough of these procedures maybe to keep doing hips and knees and maybe start shifting those procedures elsewhere in the network or upstream somehow. Again, I know it's early, but could you give some perspective on how you think that may play out in the market given so much of the volume in orthopedics in the U.
S. Is done by sort of lower volume centers?
Yes. It is early. So it's an accurate comment. Could we see in some hospitals a shift? It's possible.
But I think it's too early to say that that's going to be a discernible enough trend or how it impacts the volumes of hospitals where it shifts to to make any big comments on it. I'm sorry, we just don't have more insights yet given the early stage combined with the fact that there's no penalty in the 1st year.
Thank you. There are no further questions at this time. I will now turn the conference back over to Mr. Kevin Lobo for any closing remarks.
So thank you all for joining our call. Our conference call for the Q3 2016 results will be held on October 27. Also, our analyst meeting and products fair will be held on November 9 at our Orthopaedics headquarters in Mahwah, New Jersey. Thank you.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.