Welcome to the Second Quarter 2020 Stryker Earnings Call. My name is Michelle, 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.
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 in Exhibit 2 Stryker's current report on Form 8 ks filled today with the SEC. I will now turn the call over to Mr.
Kevin Alobo, 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 and Preston Wells, Vice President of Investor Relations. For today's call, I'll provide opening comments, followed by Preston with some perspectives on the recovery trends across our diverse businesses. Glenn will then provide additional details regarding our quarterly results before opening the call to Q and A. As we begin today's call, I would like to start by thanking all our employees for their continued commitment to ensuring the safety of their colleagues, their families and our customers.
I am very pleased with the resiliency of our organization, which has maintained high employee engagement and customer connections through the pandemic. From our sales forces who have remained present and essential to the doctors and caregivers they support, to our manufacturing teams that have worked around the clock to optimize supply with ever changing demand, and across our workforce, most of whom continue to collaborate virtually, the Stryker spirit remains alive and well. Our 2nd quarter sales declined organically by 24%, reflecting the impacts of COVID-nineteen across all geographies and the majority of our product lines. The results reflect progressive improvement in overall sales through the quarter, but do vary by region. The sequential improvement can be tied to the initial cancellation and subsequent gradual return of elective procedures during the quarter.
As mentioned in our Q1 call, we took aggressive steps early on to ensure the safety of our employees and customers while managing discretionary spending across our P and L in response to the slowdown in sales. Our cost containment measures included significant reductions in travel and meetings, a slowdown in hiring and salary reductions across senior leaders. In addition, we made other efforts to focus on cash conservation, including the idling of select product lines and facilities across our network starting in May. These actions combined with our sales performance resulted in adjusted earnings per share of $0.64 a decline of nearly 68% versus the prior year. As we look at the quarter, the low point in sales occurred in April and then improved sequentially through the end of June.
As a reminder, implants and disposables represent about 75% of our sales and small capital represents 16%. Small capital generally mirrors the performance and trends of implants and disposable. The largest improvements within the quarter were in hips, knees, spine trauma, sports medicine and neurotechnology, reflecting the resumption of elective procedures and the gradual opening of previously locked down communities and geographies. With respect to our large capital businesses, Medical Capital and Mako were standouts, both posting strong growth for the quarter. Our Mako robotic technology remains in high demand with our customers despite any financial constraints resulting from the pandemic.
By geography, Japan and Canada performed well, while Europe, China and Australia showed progressive improvement through the quarter. In contrast, Latin America and India continue to be weaker as the impacts of COVID-nineteen remain more widespread in those regions. In Q3, we expect the recovery to continue, but do not expect it to be linear, while local governments deal with varying degrees of resurgences. Our R and D programs continue to proceed despite logistical challenges caused by the pandemic, and we spent at a healthy rate in the quarter. We are actively engaging with our customers, while ensuring that our product supply is in a strong position to capitalize as procedures resume.
However, given the fluid nature of the situation, we are not providing Q3 or full year guidance. We are proceeding with the integration efforts regarding the right medical transaction. We are working cooperatively with the regulators to obtain the necessary approvals for the transaction, including, as previously announced, proposing to divest our Star total ankle replacement product. This process is well underway and the UK Competition and Markets Authority recently announced that it will consider our proposed undertakings in lieu of a Phase 2 investigation. We continue to expect to close the transaction around the end of Q3 or beginning of Q4.
Please note, beyond this update, we will not be taking any questions regarding Wright Medical or the pending transaction on today's call. This has been the most unique situation that most of us have ever experienced. While we have been impacted financially as a result of the government shutdowns and deferrals of elective procedures, This time has also allowed us opportunities to reevaluate and develop new ways to work and collaborate across our diverse group of businesses. We are prepared to emerge from the pandemic a stronger, more efficient company. I remain confident in our people, our culture and our ability to partner with our customers to meet the needs of the many patients they serve.
And now over to Preston.
Thanks, Kevin. My comments today will focus on providing additional insights into the current environment and how certain countries and products performed during the quarter. We saw progressive improvement in sales throughout the quarter with April being the low point. The improving trends were primarily driven by the resumption of elective procedures. That momentum is continuing into Q3 as July is trending better than June.
We estimate that approximately 40% to 50% of our total global revenue includes procedures that are considered elective or more accurately can be in many cases deferred for a period of time. This primarily includes hips and knees, extremities, spine, sports medicine and our ENT business. Geographically elective procedure recovery varied depending on the government actions and severity of the pandemic. In addition to the U. S.
Countries like China, Australia and Germany have also shown month to month improvements as elective procedures returned during the quarter, reaching approximately 85% to 90% of pre COVID levels. The UK, India and Latin America lapped during the quarter at less than 50% of pre COVID levels as the pandemic continues to spread in these countries. During the quarter, we saw strong demand for our large capital products, specifically beds and stretchers within our medical division and ongoing high demand for our Mako robot technology. In the Q2, we were very pleased with the Mako installations in the U. S.
Including increased sales to ASCs and competitive accounts. We continue to see a growing percentage of both hip and knee replacement surgeries being performed with a Mako robot. As it relates to knees, there is an ongoing shift towards Cementless. We also launched a new software upgrade for the Mako hip program that includes features which improve the overall ease of use. Our leadership in orthopedic robotics, a strong order book and a solid innovation pipeline positions us well to see continued above market growth in joint replacement.
While we have made meaningful reductions and many discretionary spend items, our investment in R and D remains robust as does our healthy cadence of new product introductions. During the first half of the year, we are pleased with the customer feedback and results from several new products, some of which include Spine's Niagara Lateral System, Mini Fragg Plating and Trauma and Neurovascular Becca 71 and 74 intermediate catheters. These and other launches will contribute to our performance for the rest of the year and position us well for the future. Although the COVID-nineteen pandemic has led to a slowdown in elective procedures, it has also placed increased emphasis on the safety of healthcare providers and their patients. Over the years, we have built an extensive portfolio within our MedSurg businesses addressing many of the challenges our customers face with a focus on accident and infection prevention and caregiver safety.
This includes products like our patient hygiene and disinfecting products, personal protective equipment, waste management and smoke evacuation devices, along with the Lucas chest compression system, which delivers high quality automated CPR while reducing the proximity of the caregiver to the patient. With the ongoing threat of COVID-nineteen infection, the Department of Defense identified automated compression devices such as a Lucas device as the best practice for delivery of CPR. Demand for these products grew during the quarter in response to these increased safety concerns. We will continue to leverage our diverse portfolio to address changing trends and meet the expectations of our customers, caregivers and patients. With that, I will now turn the call over to Glenn.
Thanks, Preston. Today, I will focus my comments on our Q2 financial results, related drivers and liquidity matters. Our detailed financial results have been provided in today's press release. Our organic sales decline was 24% in the quarter. These results included a decline in the U.
S. Of 24 27.4 percent and an international decline of 14.5%. As a reminder, this quarter included the same number of selling days as compared to Q2 2019. Pricing in the quarter was unfavorable 0.2% from the prior year quarter and foreign currency had an unfavorable 0.8% impact on sales. During the quarter, our growth was significantly negatively impacted by reductions in elective surgeries, the effects of shelter in place orders across many geographies and the pause in hospital capital spending as the medical community navigates this pandemic.
Throughout the quarter, we saw progressive improvement in the expansion of elective surgeries across many geographies, which resulted in significant variability in our sales. On an overall basis, our sales decline ranged from -36% in April to -10% in June. Our adjusted quarterly EPS of $0.64 represents a decline of 67.7 percent from Q2 2019. The foreign currency impact on 2nd quarter EPS was minimal. Certain other factors resulted in disproportionately negative impacts on EPS, including the loss of higher margin sales and a loss of leverage related to manufacturing and operational fixed costs.
These were partially offset by our strong focus on disciplined cost control within the quarter. Will now provide some brief comments on segment sales. Orthopaedics had constant currency and organic sales decline of 29.3%. This included a U. S.
Decline of 28.8%. We saw declines across our hip, knee and trauma businesses. We also saw very strong growth in our Mako business, somewhat offset by declines in bone cement. Internationally, orthopedics had an organic decline of 30.4%, which reflects the downturn in elective procedures across most geographies. MedSurg had constant currency decline of 16.4% and an organic sales decline of 17%, which included a 22.2% decline in the U.
S. Instruments had U. S. Organic sales decline of 38% driven by power tools, waste management and search account. This was partially offset by increases in instruments PPE products, namely our flight helmet and other protective products.
As a reminder, instruments also had a very high comparable in Q2 2019 with 19% growth. Endoscopy had U. S. Organic sales decline of 34.1%. This reflects a slowdown in its video, general surgery, communications and sports medicine businesses.
The medical division had U. S. Organic growth of 5.4%, reflecting strong demand across its bed and emergency care businesses, resulting from demand tied to COVID-nineteen, which was offset by declines in Sage related to less patient flow. Internationally, MedSurg had organic sales growth of 4.6 percent, reflecting strong demand for medical products in Australia, Canada, Europe and emerging markets. Neurotechnology and Spine had a constant currency decline of 28.9% and an organic decline of 29.9%.
Our U. S. Neurotech business posted a constant currency decline of 36.4% and a 37.5% organic decline for the quarter. This reflects a slowdown in procedures in the quarter related to all our Neurotech businesses. The decline was most pronounced in our ENT, neurosurgical and CMF businesses.
Internationally, neurotechnology and spine had an organic decline of 13%, reflecting slowdowns in Europe, Canada and emerging markets, which was offset by a solid performance in our neurovascular business. Now I will discuss operating metrics in the quarter. Our adjusted gross margin of 57.3% was unfavorable 8.50 basis points from the prior year quarter. Compared to the prior year, gross margin was unfavorably impacted by fixed cost absorption and business mix. The fixed cost absorption was significant and related to certain costs associated with idle manufacturing that normally would be capitalized into inventory.
During Q2, we operated at 60% of normal capacity and the related unabsorbed costs diluted our margin by approximately 400 basis points. We anticipate Q3 will be at an average capacity of approximately 85%. Unabsorbed costs will continue to impact our margin until our manufacturing is operating at normal levels. Adjusted R and D spending was 7.6 percent of sales. Our adjusted SG and A was 37.1 percent of sales, which was 3 60 basis points unfavorable to the prior year quarter.
Compared to the prior year, SG and A was unfavorably impacted by business mix and deleveraging of selling and marketing costs, partially offset by operating expense savings actions taken during the quarter. In summary for the quarter, our adjusted operating margin was 12.5% of sales. The measures we enacted in March covering most of our discretionary spending, including curtailments in hiring, travel, meetings and consulting, as well as the idling of certain manufacturing lines and facilities, including furloughing the related workers continued throughout the Q2. Related to other income and expense as compared to prior year quarter, we saw a decline in investment income earned on deposits and interest expense increases related to increases in our debt outstanding. Our 2nd quarter had an adjusted effective tax rate of 14.4%.
Turning to cash flow and liquidity. We ended the 2nd quarter with cash and marketable securities of $6,600,000,000 including $4,600,000,000 related to Rite Medical Funding and generated approximately $620,000,000 of cash from operations in the quarter, which was ahead of our internal targets. This reflects earnings and a reduction in working capital, primarily driven by accounts receivable during the quarter. As I noted in January, we did not repurchase any shares in Q1 nor do we plan to do so the remainder of the year. The actions that we implemented in the Q1 to conserve cash continued in Q2 and included discretionary spending controls, reduction in planned capital expenditures and project spending, focusing on opportunities in accounts payable and slowing M and A activities.
Concerning our cash holdings and available credit lines, our liquidity from a liquidity standpoint, we continue to be well positioned. We currently have available credit lines, none of which are drawn on at this time of approximately 3,000,000,000 dollars In addition, our investment grade credit rating supports good access to the capital markets and we have taken advantage of historically low rates to execute additional funding in the quarter of approximately $2,300,000,000 for the Wright Medical transaction. As it relates to this transaction, we estimate completing the required funding in the Q3 with the execution of up to an additional $1,000,000,000 In terms of other future capital requirements, our quarterly dividend is approximately $215,000,000 and we have $13,000,000 bond maturity due in Q4. As it relates to guidance for Q3 and the full year, we reaffirm our previously announced decision to withdraw guidance given the continued significance of uncertainties at this time. We will continue to evaluate operating circumstances and the market environment for stability prior to reinstitution of guidance.
And now I will open it up for Q and A.
Oh, Thank you. We will now begin the question and answer session. Your first call comes from the line of Matt Miksic from Credit Suisse. Your first question comes from the line of Bob Hopkins from Bank of America.
Thanks. Can you hear me okay?
Yes, we can Bob. Yes.
Great. Thanks for taking the question. First question is, if I heard you correctly that June revenues were down 10% for the whole company. Can you give me a sense as to how variable the growth was within divisions for June? I'm sure folks would love to hear kind of how hips and knees did in June relative to that 10%?
Yes. Sure, Bob. This is Glenn. I think in general, we're not giving specific guidance, but that minus 10% is directionally correct across most of our businesses. And then we fully expect to see continued momentum moving into July.
Okay. So that was the right number. Okay. And then one other thing I'd rather just in terms of thinking about the rest of the year and I appreciate you don't have guidance here, but most medtech companies have offered up some comments on Q4 that suggest they think a reasonable first cut at Q4 is that they might be up a little bit or down a little bit on the year, plus or minus 0 is kind of what we're hearing from a lot of your peers. I know you're not giving full guidance, but is there any reason to think that Stryker might be way outside that band either to the positive or the negative given what you're seeing in your business?
Bob, there's a reason we're not giving guidance, right, because we just don't know what's going to happen in the future. But there isn't any reason to think that there's something wildly different about our business. We perform slightly better than the market, 100 basis points to 200 basis points on top line. We've done it for 8 years in a row. You should expect us to continue to have the same type of performance.
And it really does depend on what the market does. And once we have a better visibility, we'll give guidance. But there's nothing unique about our business that would cause us to be wildly out of line.
Okay. Thanks for that. Appreciate it.
And pardon the interruptions as we work through a few logistics. And your next question comes from the line of David Lewis from Morgan Stanley.
Thanks for taking the question. Just a couple for me here, maybe one on capital, one strategic for Kevin. So Kevin, just on the broader capital environment, I'm just curious, you made this distinction this afternoon of small capital versus large capital. I wonder if you could just give us a sense of how you see the capital environment, how hospitals are reacting to the CARES Act? I think a lot of investors are concerned about significant volatility or lack of demand for certain types of products.
Maybe you could help us with sort of small capital, large capital with maybe some emphasis on the bed business is very strong, specifically strong internationally and how durable you see that business and a quick follow-up.
Okay, great. Well, so first of all, starting off with the CARES Act. So $175,000,000,000 has been authorized to go to hospitals, only $115,000,000,000 has actually been disbursed. So there's still another $60,000,000,000 to be disbursed. And that's prior to the next round of legislation, right?
So then the next stimulus stimulation package will add to that. And so money is flowing to the hospitals. We were really pleased with the performance of medical obviously. Small capital tends not to be as much of a worry they need it to do the procedures. So that's why it tends to trend very, very closely with elective procedures.
They need power tools to do the knee replacement. They need the cameras to do the general surgery products. So that tends never to be really hit too much. It's more of the large capital that tends to be the constraint. But because of the coronavirus, a lot of our large capital in terms of beds and stretchers were actually necessary and we saw those being purchased.
Mako was really a pleasant surprise in the quarter to see the amount of robots we're able to install. There was more financing than normal, I would say, in the second quarter as hospitals tried to conserve as much short term cash as they could. But it's hard to predict how this is going to play out over the course of the year. I would say for now, we're feeling very good about the state of our businesses. Internationally, we had a terrific performance out of medical.
And a lot of that is governments around the world really saying this is really important to have Lucas chest compression devices, very important to have ICU beds, etcetera. And so we had just a terrific performance. We also don't have SAGES as a much smaller business for medical outside the United States. So that weighed heavily on our U. S.
Performance. We actually had strong medical capital in the United States as well. But we're feeling very good about the state of the capital business. It's not like the last time where you didn't have this kind of stimulation from the government to go going directly into hospitals and hospitals are very motivated to increase their procedures.
Okay, very helpful. And then Kevin, as we head into next year, you seem very committed to the right medical transaction. So as we head into 2021, your Stryker's balance sheet will be the most levered it's been in the most recent memory certainly. So one of the hallmarks of the business has been the ability to be flexible and go after growth oriented M and A and you've been one of the 2 top most active acquirers in large cap medtech. So how should investors think about your ability to do deals in 2021 and beyond for 2021 2022?
And should they all be concerned about the inability to do deals having an impact on the growth rate over the next couple of years? Thanks so much.
Yes. Thank you. So clearly, we'll be at a high leverage point and we do have intentions to start paying down that debt, but we haven't stopped our business development teams. They're still out looking at targets. I would expect that they won't be, certainly as large as some of the targets we've done more recently.
But you should expect us to continue to be busy with bolt on type of acquisitions. And as you saw, we had a really strong performance in cash flow in the Q2. As we generate cash, we'll be able to both pay down debt and stay busy in the M and A market.
And your next question comes from the line of Joanne Wuensch from Citibank.
Good evening, everybody. Two questions. The first one is, is there a particular segment that you see recovering faster than others? And the second question really is, as you look into next year, help me understand how to think about the financial model and some sense of normalcy? Thanks.
Well, I think we were pretty clear in the opening comments that our businesses really recover with the recovery of surgery. And so as the surgeries come back, all of our businesses are sort of resuming at a very similar pace. We don't have huge variability. I would say early on in the pandemic ENT because of those aerosolizing procedures were clearly the hardest hit. And then the hips and knees were sort of next hardest hit.
But I would say now as the economy is reopening, we're really getting a nice uptake across a full portfolio. There really isn't that much variability as it relates to the elective procedures. Capital is a little bit different. So in large capital area, the booms and lights and that type of capital wasn't as robust as beds and stretchers in Mako. So there is some variability, but again, not too dramatic.
And so I think you're going to see our business kind of come back as the economy comes back in a fairly synchronous manner. And then I wasn't quite sure I got your question about next year's financial model. Joanne, do you mind repeating that?
Sure. I'm just trying to look past this year in some ways because investors are valuing stocks on 2021 and in some cases 2022. And so I'm just trying to think of how do you think about next year and it could be qualitatively or quantitatively?
Glenn, I think you're muted.
Hey, sorry, Joanne, I was muted. I gave you a great answer though.
I wrote it
all down.
You're good.
Hey, so Joanne, I'll speak qualitative to 2021. We're not really looking to guide just yet and expect that that will happen after we have our Q4 earnings call. But as we think about next year, we do think that there will be a progressive recovery and we're optimistic based on what we see right now. And so that will obviously play forward into 2021. From a cost structure standpoint, we are sort of experiencing sort of new ways of working and being more virtual and obviously saving on travel and other things.
And I think there'll be lots of examples of how that might play into our operating structure in the future. We currently have a whole task force made up of our senior leadership team that's really looking at both ways of working and how we might come back. So I fully expect that as we look at our financial model and our operating structure for next year, we'll expect to see sort of the impact of some of that.
Thank you.
And your next question comes from the line of Matt Miksic from Credit Suisse.
Hey, guys. Thanks for taking the questions. I had one follow-up on Mako and robotic surgery. Kevin, you'd mentioned a couple of times the strengths in the quarter and we rewind back to the beginning of Q2, I think there were questions as to how active hospitals would be in bringing in new systems and it sounds like it's kind of much stronger. Can you talk a little bit about maybe the mix or the regional aspects of the strength and how your push into ASC is the sort of ASC offering strategy is playing into that?
And I have one follow-up on spine.
Yes, sure, Matt. We're not going to get into specific numbers as we stop providing that, as you know, a couple of quarters ago. But I would tell you that we had slightly higher competitive placements than we had typically before and a bit more activity in the ASCs. And we've been selling to the ASCs before, so that's not new. But clearly, there is an accelerating trend towards the ASCs.
It was already starting to ramp, and I think the pandemic is causing that to increase further. Keep in mind, there's still only about 5% to 10% of joint replacement procedures done in ASC. So even though the ramp is picking up, it's going to take time before it becomes a very meaningful portion of procedures. But I would say those are the two areas that were higher than normal was ASCs and competitive accounts. And then what I'd tell you is overall, I was pleasantly surprised, not knowing how hospitals were going to react.
Our team did an awesome job in the quarter of being able to place a lot of robots. And even though some more of them were financing the normal, we're totally fine with that. That's been part of our offense for a long time. And hospitals understandably are trying to preserve their options. But the demand and the pull for Mako is very strong.
The order book is also very healthy. So this isn't just a 1 quarter issue. And that augurs very well for us. Every time we place an Mako, the percent of procedures done on the robot is increasing. And it tends, especially for our knees, it tends to cause an increase in cementless as well.
So those trends are continuing to rise. So it's lifting all boats within joint
as as in the summertime, summertime months, particularly now with K2M under the hood at Stryker. There is this kind of upswing in scoliosis surgery. And I'm wondering if you've seen that or seen any trends, ASCs or stronger cervical, stronger lumbar given just the challenges early in Q2 and how that's shaping up heading into Q3 here?
Yes. It's such a messy quarter, honestly, with all of the closings that are happening and shutdowns. Scoliosis obviously is seasonal every year, and that's one of the crown jewels of the K2M portfolio is their complex deformity systems. But there's nothing unusual that I would want to call out. And because there's so much noise, it's really hard for us to parse it out.
There's just a lot of noise. And as it relates to ASCs, obviously, spinal procedures are done in ASCs. That's not giant today. I think that will increase in the same way that it's increasing in large joint procedures.
Fair enough. Thanks, Kevin.
Thank you.
And your next question comes from the line of Vijay Kumar from Evercore ISI.
Hey guys, thanks for taking my question and congrats on a solid execution here. Glenn, maybe the first one for you. I think I heard some comments around capacity utilization on the manufacturing side being at 60% in 2Q, stepping up to 85% in 3Q. 1, I want to make sure I heard those numbers correct. And the implication on the gross margin side, is the implication it should step up by a couple of 100 basis points because now you're absorbing manufacturing variances better?
Yes. Hi, Vijay. Yes, you actually you heard those numbers right. Capacity was around 65% on average for Q2, and we actually do see it stepping up on an average to about 85% in Q3. In Q2, it was about a 400 basis points impact in terms of sort of fixed period costs that we had to expense as a result of some of those idlings.
You could probably do the math on that number relative to the 85% in Q3 and come pretty close to but we anticipate the amount will be. Keep in mind though that we're forecasting where we think the ramp might be and where it actually might be could be somewhat different and that certainly would impact how we ramp up manufacturing.
I was about to say the step up in that capacity is a proxy for revenues, but thanks for clarifying that. Kevin, one for you, if I had to get 3 months without the setup pricing is going to be quite bad. This is really quite remarkable, how pricing is taking out. How much of this is a function of perhaps better discipline on your part in the industry in general or is there something else going on in the industry? Thank you.
Yes, thanks for the question. We've been focused on price for a long time. And as you've seen over the past couple of years, pricing overall has moderated within our overall portfolio. So part of it is certainly our efforts and part of it is just a stable environment. The pricing environment has been fairly stable for some period of time.
And obviously, our portfolio also has evolved over time. And with our portfolio being a higher percentage of med surge relative to the total and really some great discipline showing in some of our divisions. If I look at our CMF business as an example, they've got terrific price discipline and a lot of great innovations that we've been launching that continue to demand good prices. And so we're going to continue to focus on that and we continue to expect a pretty stable pricing environment going forward.
Thanks guys.
And your And your next question comes from the line of Robbie Marcus with JPMorgan.
Great. Thanks for taking the question. I wanted to see if we could spend a minute on 2 areas that missed Street numbers by a good amount, neurotech and instruments. And I was wondering if you could add any extra commentary. I know I guess people weren't taking into account how much some of the ENT might have been down in quarter.
But any other color you could add on instruments in neurotech and the trends there, obviously related to COVID, but just any color you could add?
Okay, sure. I'll take the Neurotech part and then maybe I'll ask Glenn to comment on instruments. So within Neurotech, we have 4 businesses. So we have our neurovascular business, our cranial maxillofacial business, our neurosurgery business, which is think about the neuro powered instruments and a portfolio of neurosurgical products and ENT. So within those four businesses, a lot of neurovascular is the largest on a global basis, it's more heavily weighted to outside the United States.
So roughly 60% plus of their sales are OUS. So in the U. S, you have a much higher weighting on ENT, CMF and neurosurgical, all three of which obviously were heavily impacted by the pandemic. Neurovascular was less impacted by the pandemic. Conversely, those three businesses don't have a very high percentage of their sales outside the United States.
So when you look at the neurotech basket, you can see that impact in international being much better having much better performance than in the United States, just given the mixes of those businesses. But that's I think perhaps why a lot of times, when I'm speaking to investors, sometimes they sort of simplify that. Neurovascular is the neurotech business, but it's really just one of the 4 businesses. And ENT was the most heavily impacted business of all of the business of Stryker given the aerosolizing procedures. And then Glenn, do you want to talk about instruments?
Yes. Sure, sure. On instruments, they primarily have 2 very large segments. One of those being orthopedic solutions, which is powered instruments that are primarily used in orthopedic procedures. And then the other is surgical technologies, which has our safety products, our waste management products.
Obviously, the orthopedic solutions scaled downward with just the elective procedure drop offs in orthopedics. On the surgical technology front, I would tell you that, yes, while some of their equipment was significantly down, their personal protective equipment and products that relate to that did very well. I would also tell you that and I subtly said this in my earnings script that last year instruments grew almost 19% in the quarter and so it was a very, very high comparable and bar that they would have to overcome to even come close to growth. And I think you see that impact in the decline they had for the quarter.
Appreciate that. And maybe just a quick follow-up. You guys spend $1,000,000,000 in R and D and have a very active pipeline. We've heard from some of the cardio names that have bigger trials with longer timelines that they're seeing about 6 month delays. The R and D is down modestly in Q2.
How should we think about any potential delays to the pipeline, if at all at Stryker? Thanks.
Yes. I wouldn't expect much in the way of delays. Some of the reason for the lower spending is just access to labs to do testing. And so the pandemic did crimp us a little bit, but very modestly. And keep in mind that you really only have 2 divisions that have PMA products, our neurovascular division and our physio control business.
And PMA products are the ones that really do demand those clinical trials. And we just have launched a series of terrific products within neurovascular. So we actually have an innovation pipeline that has is very, very healthy and refreshed within neurovascular. We weren't on the cusp of something brand new. In fact, we had some really great news in the last quarter on some new approvals.
So our SURPASS evolved, which is our newer floater burning stent was approved in the United States. Our original floater burning stent, the Streamline was approved in China and our Atlas stent was also approved in China. So that was all good news. But don't expect much in the way of delays. Our product pipelines continue to march ahead.
And I think the makeup of our business being much more 510 gives us the ability to continue to launch products at a very healthy pace.
Great. Thanks a lot.
And your next question comes from the line of Kayla Crum from SunTrust.
Great. Hi, guys. Thanks so much for taking our questions tonight. So I know you're not going to talk about the STAAR divestiture process, but I think you sit in a pretty interesting spot right now just having the perspective of a company trying to divest the business, but also opening up into evaluating tuck ins at this time. So I just would be curious if you could comment high level on the M and A market today, what you're seeing in terms of just deal volume, potential sellers and buyer pool in this market just as compared with perhaps what you had seen a year ago?
Well, I think the pandemic caused a slowdown clearly. A lot of activity got slowed down. We slowed down our own activities to some degree. Continue to evaluate targets, but put a pause because obviously we were in sort of cash conservation mode, not knowing how long is this going to go on for. But I would say our BD teams are just as busy as ever engaging the targets.
And I think this will come back just as it always has in the past. There are still a lot of companies within medtech, a lot of smaller and innovative companies, and we're going to continue to be busy. The divestiture process relates to the regulatory process for the deal. And we're going to continue to stay active on the BD front. Obviously, as I mentioned before, Wright Medical acquisition.
And so part of our commitment with cash is going to be to pay down some of the debt, but it won't be exclusively. And we've told the rating agencies we'll continue to stay active on M and A, but it'll be obviously smaller tuck in type of deals for the near term.
Great. Thanks, Kevin. And then I just would like to touch about on vendor consolidation. Obviously, vendor consolidation has been a trend over time, but I'd love to hear if you're seeing any uptick in that more recently. Is it coming up more often in conversations with your hospital customers or is it just kind of more of the same at this point?
Thank you.
Yes, I'd say it's more of the same at this point. Hospitals are have been looking to consolidate vendors by service lines. We actually embrace that approach because we're very, very deep in each of our service lines and category leaders in the segments that we play in. We are seeing with our ASC offense that having everything that the ASC needs, whether it's booms and lights and operating tables, Mako robots as well as implants, really does give us a terrific position in ASCs. So that's an area of strength, but I would say overall not much change.
Great. Thank you. And your next question comes from the line of Larry Biegelsen with Wells Fargo.
Good afternoon. Thanks for taking the question. Kevin, I appreciate the negative 10% growth in June and the improving commentary for July. I just want to give you a chance to comment on this. I assume people come off this call thinking that Q3 should be better than that negative 10% in June given the July trends.
Is that are you guys comfortable with that without saying whether you'll grow or not, but Q3 should be better than down 10?
Well, certainly, if the current marketplace continues, it will be much better, obviously, because July is trending better than June, as we mentioned. And as long as we don't have an outbreak and have to go back to shelter in place, as long as this trend line continues, we're feeling good about Q3.
That's helpful. And then does that improvement in July also apply to the U. S? And if so, qualitatively, how are hospitals in the U. S.
Dealing with the spikes that we're all obviously seeing here? Thanks for taking the questions.
Yes, it certainly includes the United States. And obviously, we our business is more heavily weighted to the U. S. And so as that U. S.
Recovery improves, that certainly is terrific for Stryker. Even in Florida today, we're seeing hospitals continuing to do surgeries. And so that it's not as if we were going through what we went through in April. Hospitals for the most part have been pretty well equipped. They're segregating their COVID patients from the areas where they can do surgery.
I'm not saying that universally, some hospitals in Arizona, they chose to close elective surgeries down for a week, we saw that. But then they resumed the week after. So I think this notion of complete shutdowns, I don't think we're going to see that unless we have some type of rampant change in the way the virus is mutating and spreading. So I don't expect that. I think we'll have flare ups.
And the reason we don't want to give guidance is it's hard to predict the nature of those flare ups and how big those flare ups will be. But even today in the air in Texas and in Florida and Arizona, surgeries are going on. And that gives us cause for optimism for certainly for Q3 and beyond. Thank you.
And your next question comes from the line of Kristen Stewart with Barclays.
Hi. Thank you for taking my question. I just have a question regarding some of the, I guess, charges that you took in the quarter for in process asset impairment. It says that you guys were suspending some investments. Just wondering what exactly, I guess, are you spending if there are any sort of projects that, R and D projects or anything like that that are noteworthy just to explain?
And then I noticed that you guys were taking some additional charges related to I'm not sure if they're just the European MDR or if they're related to any sort of quality system improvement. Is there anything there worth mentioning just from how long I guess you anticipate taking these charges? And just any update on kind of cash flows for the rest of the year? Thanks.
Okay, Kristen. I will try to cover both of those in one fell swoop here. So you're right in the non GAAP table, you can see that we recorded charges of about $170,000,000 and they were related to in process asset impairments, product lines and just sort of some other exit costs that really resulted from our decision to suspend certain investments due to pandemic related constraints. I would tell you that the lion's share of those costs and those in process costs were related to our 2020 ERP implementation, which we paused as a result of the pandemic. And really just in accordance with kind of the accounting rules and due to all the uncertainties of the situation, we were unsure of what the restart date would be of our ERP project at this time.
And so thus, we impaired some of those related in process costs that had been previously capitalized. And then on the other questions, yes, we continue to have costs that are related to EU MDR and we'll have those flowing into next year that are just like everyone else of our peers are recorded in our non GAAP charges and we expect that that program will likely continue for about 3 years. And then on the cash flow front, we I think if you look at our cash flow, we just for the quarter, it just really reflected good working capital performance. You combine strong collections with relatively flat inventories. We continue to work with our vendors on payment terms.
And then all of that was just complemented by just the discretionary spending controls as well as measured CapEx spend. And I think all of that combined to produce a really positive cash flow result for the quarter.
Thanks very much.
And your next question comes from the line of Rick Wise with Stifel.
Good afternoon, Kevin. You said in your opening comments, something like we're prepared to emerge from the pandemic a stronger, more efficient company. And I obviously see no reason to doubt that, and you're highlighting cutting discretionary spend, etcetera, focusing on the pipeline. But I'm just curious what that means in your mind and what how we should hear you? Are you saying, Rick, as we get or to all of us, as we get back to a more normal procedure environment, we're going to grow as we did and our margins are going to be what they were?
Or are you saying something more that you're trying to position the company to grow even faster with even better margins because you're taking special actions, special initiatives to plan for that. Do you
see what I'm asking? Well, I know exactly what you're asking. And my CFO on my Zoom screen is waving his head saying, please don't give guidance. And so Rick, what I would tell you, I'll give you some qualitative commentary. So the qualitative commentary is what the pandemic has provided us
is really shown us
how effective we can us is really shown us how effective we can be without having to be the high cost, high travel company we've been historically. We're a very high touch culture. We're realizing that there's a lot that we can do virtually that will be permanent. There's a lot of education, med ed that some of it you have to do in person, cadaver lab type, but there's others that you don't you can do very, very effectively and efficiently virtually. The buildings and facilities that we have, a lot of we're going to embrace flexible work arrangements going forward and we are not going to need the same real estate by any stretch that we have today.
And a lot of our CapEx over the past few years has been on office buildings and because of our growth and all the headcount we've been adding and all the companies we've been acquiring. And frankly, we're seeing a big change in what's going to be required in the future. So those are all areas on the efficiency front. And what I would tell you is this pandemic has shrunk our company. Our divisions are collaborating more than ever.
And I think the nature of the pandemic has caused our divisions to work more together. And that's sort of one of the untapped assets of Stryker is as we collaborate, we're seeing it with our ASC offense. We're seeing it with the 3 d printing. We're seeing it with sort of technology areas where different divisions can tap into enabling technologies as an example. And we're collaborating better than we ever have before.
And I think that will continue once we go back to, let's say, some more normal environment. And it's really unleashing a different kind of potential. So I can't put a fine point on numbers related to this, Rick, but I am feeling tremendous momentum in the company. And the culture is very strong and these changes are going to make us better as an organization going forward. How we use those efficiencies that we generate, it certainly gives us confidence that we'll get back to the nice off margin expansion you saw over the past couple of years.
That gives us tremendous confidence we can continue that. But I think there's some untapped potential in our divisions and through collaboration that we're going to start to see manifest itself in our results.
Interesting. And Kevin, just last one from me. We haven't maybe focused a ton on this call on international. You've spent tremendous amount of time rethinking Europe over the years. You highlighted that Latin America, India is still weak.
We haven't touched much on China. Can you give us just at a high level what you're feeling good about, what you're feeling concerned about as we think about the recovery or what initiatives you have underway there? Just your high level thoughts internationally right now. Thank you.
Yes, sure. So first of all, I would start off with the developed countries internationally. I feel very strong about that, strong about Japan, Australia, Canada, Europe. I mean, we are really in great position in all the developed markets, even Korea. Feel very, very strong about our position in developed markets.
Emerging markets is the big area of opportunity for Stryker over the next 5, 10 years. I feel very good about the leaders we put in place. We put in terrific leaders in our major priority countries, whether it's China, India, Turkey, Latin America for sure, just fantastic leaders. And we had a terrific year in 2019. We grew roughly 20% in emerging markets and it was outstanding.
And we were really heading into this year with the wind at our backs. Unfortunately, the pandemic has thrown a huge wrench into that. When we talked about the problems in India and the problems in Latin America, they're really not Stryker problems, they're pandemic related challenges that we have. I am expecting us to get back into the winning spirit that we had towards the end of last year. And I feel that because we have the right leadership in place.
We have the right kind of models in place. We've gone a little bit more direct in some countries. Turkey is a good example where we bought out a distributor. So I do think we have the right infrastructure. It took us time, right?
You remember 4 or 5 years ago, we were struggling in many of those countries. And but I do feel we're on a solid footing and we will recover as those markets recover related to this pandemic.
Thanks again.
And your next question comes from the line of Matthew O'Brien with Piper Sandler.
Good afternoon, guys. This is
Patrick on for Matt. Thank you so much for taking the questions. Just one for us. I just would love to go back to the financing for Mako specifically. I'm curious about the Flex Financial program.
I know as more ASCs acquire Mako Systems, you talked about this being an important element for those placements. But have larger hospitals been using the Flex Financial program as well? Or are you actually finding that things are operating on a more ad hoc basis when it comes to some of these financing agreements you've been having with systems? Any color there would be really appreciated. Thank you.
Sure.
Hi, Patrick. This is Glenn. I'll answer that. You know what, our Flex business is as busy as it's ever been. And I would tell you that just given in the current conditions and maybe some of the uncertainties hospitals may have about their liquidity.
And I think that the fact that we can use Flex Financial to sort of customize these financial options for our customers is certainly making a very big impact on those capital businesses. I would tell you that during Q2 Mako sales were quite robust and we supported our customers through a variety of financing options. And then lastly, the last bit of color I'll say is that just given the circumstances, we definitely are seeing a shift to financing more deals than we have historically experienced. And I fully believe that, that will continue throughout the rest of this year.
Thanks, guys.
And your next question comes from the line of Matt Taylor with UBS.
Thanks. This is actually Young for Matt. I guess maybe a question on Mako, just going back to the comment on the competitive account wins. Are you going up against the other robotic systems in the field more and more and winning directly? Or are those competitive account wins and accounts that don't currently have robotics yet?
Hi, this is Preston. I'll take that one. Just as we think about where we're going and the expansion of Mako and the opportunity that still exists, given the penetration that's currently there today. I think we have opportunities all throughout. So whether they're competitive accounts that are in or out, we're really just going to all of those different accounts and trying to find areas to place Mako.
Okay, great. Very helpful. And I guess another question just on the sort of your visibility into surgical calendars and maybe the type of patients that's getting procedures. Just trying to understand how much of the surgeries are working through the backlog versus new patients and if you have visibility into that? Thanks.
Yes. So what I would value as you think about the catch up, there was clearly as we came into the recovery, some level of patients that had previously deferred procedures that were catching up in having those procedures done. We also know that the backlog was big and there still are some patients that are out there that have some level of anxiety and maybe they continue to defer some of those procedures for some bit of time. I think it's important though if you think about the products that we have and the disease states that we serve, those disease states don't really improve over time. And so we believe that many of those patients will return to have those procedures done at some point in time.
The other thing I would say is as this pandemic was happening, we do know that surgeons were not only cleaning and clearing through the backlog, but they were also seeing new patients whether that was in office sometimes or through telemedicine. So because of those things we believe that the backlog remains strong into Q3.
And your next question is from the line of Richard Newitter from Silicon Valley Bank.
Hi. Thanks for taking the questions. So I just wanted to follow-up on the trends in the ASV, specifically as it relates to robotics, very encouraged to hear that you're seeing increased demand for Mako there that drove some of the placements. I guess I'm just curious, we've heard in the past that robotics in the ASC setting might be a harder sell. So I look at this year, what the where the value proposition is resonating the strongest?
And in particular, one
of the things that we've heard
from our competitors who are offering robotic systems and specifically saying that they're better positioned to potentially sell to the ASC, it relates to the CT scan and the lack of a need for a CT scan. So if you could just comment there the extent to which that has been a barrier at all in the past And any comments that you can offer further on the receptivity in this care setting for robotics? Thanks.
Yes, thanks. The surgeons that are operating the ASCs want to have the best technology. They want to be able to do the same kind of procedures they used to do in the hospital. And I would say the CT scanner, it's not been a barrier whatsoever, at least not recently. I would say when Mako was earlier on when we were initially launching our total knee, we had little flare ups here and there across the country about getting the CT scan done.
But if you want to do this the most accurately, you need a very, very accurate scan to be able to do the procedure the best way possible. And right now, I would say it's just a whimper of a sound. We really don't hear much of anything. And frankly, there's a huge degree of interest for Mako in the ASC. And that we saw that in the actual numbers in this quarter.
That's helpful. And just on the topic of ASCs, Kevin, appreciate the insights as to how Stryker might be uniquely positioned to serve that care setting with your diverse platform and the fact that you're effectively deep across a variety of service lines as a one stop shop for the needs of the surgeons. On the pricing side, particularly on implant pricing, do you see the trend towards ASCs eventually having an impact on pricing? Is it going to get worse? And is implant pricing kind of set to go downwards as an increased number of procedures get performed there?
Well, I can tell you right now, we're not seeing you saw the price numbers that we posted. And I would tell you, we're not seeing much of a difference in pricing in the ASC versus the hospital today. A lot of it really does I think it's going to depend on the ownership structure of the ASC. Is it affiliated with the hospital? I can't predict what's going to happen 5 years from now.
ASCs run very, very profitably today. Their EBITDAs are very healthy. They're actually they are financially minded and they're good business people. But so our hospitals have been pushing us on price for years. So will there be pressure from the ASC?
Sure. Is it going to be unique and different? I don't really see that. At least we're not seeing any signs of that right now. But we'll see how that evolves over time.
And your next question comes from the line of Josh Jennings from Cowen.
Good afternoon. Thanks, Kevin and Glen. Just one question for me. I appreciate all the detail you provide in terms of the improvement sequential improvement in procedures. I was hoping you can maybe lay out some trends intra quarter and maybe even into July on what you're seeing in terms of the demand for your capital that's considered COVID essential within hospitals has done very well in Q2.
Are you still seeing elevated demand or should we be thinking about that tapering off as COVID is getting more under control? Thanks for taking my question.
Absolutely, Josh, it's Preston. Just to think about that, you're right. I think with the COVID response for some of that larger capital, certainly saw the big uptick early in the quarter. It's hard to say given where we are and some of the continuations of flare ups and shift around of demand, what's really pull forward versus what's going to be the normal.
So I
would say as we think about that, we still see a strong order book as we exited in our capital businesses. And at this point in time, we've not seen any significant stockpiling of our capital equipment either. So I would say it's hard to tell where that's going to be as we look forward, but it's certainly strong throughout the quarter, second quarter.
Appreciate it. Thanks.
And your next question comes from the line of Kyle Rose with Canaccord.
Great. Thank you for taking the question. Just one for me. Very encouraged to see the strength in Mako in the quarter. And I know a lot has been asked here, but I wondered, Kevin, if you could just give us more of a higher level perspective of the orthopedic robotics market at this point.
I mean, are the customers you're seeing, are they still the early adopters looking to differentiate themselves in the market? Are these purchases more defensive because the hospital on the other side of town acquired 1? And then how do you view the size of the market just from a peer units that can be placed in the field, particularly given the accelerated interest from not just the hospital side, but also the ASC side?
Yes. So that's a great question. Predicting S curve adoption rates or new technology, it's always a challenge, right, because it's not something we do every day. It's not like launching a new power tool or launching a new camera. We can predict those curves pretty effectively.
I would tell you that there's critical mass is really starting to happen. There's a momentum. There's a belief that this is the future. And so we're past the early adopter phase now. We have hospitals buying their 2nd, 3rd, 4th, 5th Mako large systems.
And we have competitive pressures now, of course, that occur related to that. But the evidence and that the happy patients that are telling their stories and surgeons seeing great results, I think we still have a long way to go. It's still very early in the cycle. And we're pretty excited about the degree of interest even through a pandemic to be able to have that type of interest means we really are getting to the point where it's starting to become accepted. It's starting to people are seeing the benefits.
They wouldn't be buying their 2nd or 3rd or 4th if they really didn't see clear benefits to these procedures. So that gives us a lot of excitement about the future. But I would say we're still in the early innings of given that there's 5,000 hospitals out there and a large number of them do orthopedic procedures, we're still at a very, very early phase.
And your last question comes from Ryan Zimmerman with BTIG.
Thank you for squeezing me in. Kevin, I think if I recall, the neurovascular market saw a slowdown last quarter, which certainly a bit concerning clinically. But taking your commentary today about neurovascular at more normalized levels, I wonder if you could just elaborate on that dynamic relative to your expectations and kind of is the market back to a level you expect? Is there room for that to come back further? And anything competitively that may have impacted you in the quarter just given the performance?
Thank you.
Yes, thanks. No, it's not all the way back yet to the sort of the robust growth I'd add before, but it made a big step forward as the quarter as we sort of move towards the end of the quarter. And we were surprised that we really thought neurovascular was more like trauma, core trauma that patients get a stroke are going to rush in or and they stayed away from hospitals. It was a bit of a surprise that it went down and I don't think that was unique to us. We didn't see anything materially different from a competitive landscape.
The impacts of the business were really market related. And as the market improves, we feel we're going to be in very good position, especially with the new products. So the new large bore catheters that we launched, they were just a limited launch and even the surpass of all forward diverting stents, we weren't able to get to all the proctoring and training that you have to do. So that's been sort of a limited launch. So if anything, we have a bit of a new product tailwind as we get out into the, let's say, the latter parts of Q3 and then into Q4.
But not much on the competitive front. It really has been a market dynamic issue where I guess hemorrhagic stroke, some of it is quasi or let's call it semi elective, which I would have never thought. But those are coming back and I expect that the market of neurovascular will really improve going forward.
Okay. Thank you. And then just really briefly for me. How much within Mako, the order book in terms of existing orders that are in process versus maybe the other side of the funnel. I think investors have had somewhat of a concern that while capital cycles are still robust, they may not reflect necessarily weakness.
They don't reflect weakness today, but 6 months from now, they could be weak as there starts to be a gap in capital. I'm just wondering if you could elaborate just on that strong order book that you did call out today. Thank you.
Yes. I think even in capital constrained times, there's certain capital people really want and they will find the money. If it means they're going to have not spend money in other areas to be able to buy the technology they want. What we're seeing with Mako is this is technology they want and they're going to find a way to get it. And if that means using Flex Financial, great, they'll use Flex Financial.
If that means curbing certain capital expenditure to funnel it into our business, that's what's going to happen. When surgeons are demanding it and there are surgeons that make a lot of money, one of the silver linings of this whole pandemic and of course there aren't many, but there are some, One of the silver linings is understanding just how profitable our procedures are to hospitals. Most hospitals know it, but when you watch your bottom line sort of evaporate because you're not doing these high value procedures and we play in a lot of spaces with high value procedures, neurosurgery, spine or a joint replacement. They really want to be able to get that going again. And doing that with great technology is very profitable for the hospital.
And so I think there's been some recognition. I've certainly heard that from certain hospitals about how important these procedures are. So our belief is we have just outstanding technology that improves outcomes and that the surgeons want. And if the surgeons really want it, they're going to find a way to purchase it. And so that may not apply to all of our capital, but it certainly applies to makeup.
There are no further questions at this time. I will now turn the conference over to Mr. Kevin Lobo for any closing remarks.
So thank you all for joining our call. We look forward to sharing our Q3 results with you in October. Thank you.