Welcome to the Q2 2021 Stryker earnings call. My name is Mei, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Following the conference, we will conduct a question-and-answer session. During that time, participants will have the opportunity to ask one question and one follow-up question. If you would like to ask a question, please press star then one on your touchtone phone. This conference call is being recorded for replay purposes. Before we begin, I would like to remind you that the discussions during this conference call will include forward-looking statements. Factors that could cause actual results to differ materially are discussed in the company's most recent filings with the SEC. Also, the discussions will include certain non-GAAP financial measures.
Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release that is on exhibit to Stryker's current report on Form 8-K filed today with the SEC. I will now turn the call over to Mr. Kevin Lobo, Chairman and Chief Executive Officer. You may proceed, sir.
Welcome to Stryker's Q2 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 an update on the Wright Medical integration. Glenn will provide additional details regarding our quarterly results before opening the call to Q&A. Please note that our press release contains our results versus both 2020 and 2019. For this call, our commentary will be based on our performance versus 2019, which we believe provides a more relevant point of comparison. For the quarter, we posted organic sales growth of 9.3%, reflecting growth versus 2019 for all our major businesses. This strong result was driven by standout performances from neurovascular, Mako, Emergency Care, Sports Medicine, and our U.S. Shoulder and Total Ankle products. Each of these posted very strong double-digit growth.
International organic growth outpaced the U.S. at 14.2%, despite COVID challenges in some countries. We posted double-digit growth in most regions, including excellent results in South Pacific, China, Canada, South Korea, and many countries in Western Europe. We were also pleased to see the continued rebound in elective procedures, as both hips and knees saw quarter-over-quarter sequential improvement and both returned to growth. Also, now that we have a fuller appreciation of Wright Medical, we are delighted to have it within the Stryker family. With our H1 organic growth of 7.1%, combined with continued recovery of elective procedures, a strong order book across our capital businesses, and new product innovations, we have increased confidence in the full-year outlook. This is reflected in our upward narrowing of organic sales guidance to 9%-10% compared to 2019. Our sales performance carried through the rest of our results.
With strong margin performance and adjusted EPS growth, and cash flow conversion of over 100% in the quarter. Through the remainder of the year, we do expect a disciplined increase in spending to support our future growth expectations. Our bullish sales outlook, combined with ongoing execution on margins and continued progress on Wright Medical integration, has resulted in a raised full-year adjusted earnings per share guidance of $9.25-$9.40 a share. I continue to be impressed with the resiliency of our people and culture, which positions us well for a successful 2021 and beyond. I will now turn the call over to Preston.
Thanks, Kevin. My comments today will focus on the Q2 performance of our combined Trauma and Extremities business, including an update on the ongoing integration of Wright Medical. During the quarter, our combined worldwide Trauma and Extremities business, including Wright Medical, had a strong performance, growing 7% compared to 2019. The performance in the quarter was driven by double-digit growth in our U.S. Trauma and Upper Extremities businesses. The U.S. businesses were benefited by the recovery from COVID-related restrictions, which continues to outpace the rest of the world, as well as the ongoing execution of the U.S. selling integration. The Trauma business unit was positively impacted by the reopening of economies and the continued strong performance of key products, including T2 Alpha and the VariAx 2 Mini Fragment plating system.
Our U.S. Upper Extremities business, which remains number one in shoulder arthroplasty, grew strong double digits in the quarter behind continued strength within reverse arthroplasty portfolio, with Perform Reverse and Revision driving the growth. The Upper Extremities performance in the quarter was enhanced by the continued adoption of our Blueprint planning software, with approximately 50% of total shoulder cases completed using Blueprint. As a result of the strong performance of our Trauma and Extremities business, which grew approximately 5% in the H1 of the year, we are confident in the combined business to grow at least 6% for the full year when compared to 2019.
We are now about 9 months into the integration of Wright Medical. We remain very pleased with the progress and efficiency at which the team is moving through the integration. The U.S. integration is pacing ahead of our expectations, and cross-selling has begun in a limited capacity. We expect to continue to execute on our cross-selling priorities during the H2 of the year as we work to fortify the supply chain and processes to support cross-selling activities. Outside the U.S., the teams have successfully executed integration plans in several key markets, including the U.K., Germany, France, Japan, and China, with further countries to follow into 2022. In addition to the commercial activities, we are also executing on the integration of other operational areas, including the consolidation of distribution and sales offices, harmonization of key operational processes, and executing on our manufacturing site strategy.
Within R&D, the team also continues to make progress on aligning the long-term portfolio, pipeline strategies, and harmonized design processes. While the team has moved through the integration, they have also remained focused on executing the critical existing projects in the pipeline. This includes the recent launch of the new Tornier Perform Humeral System, which offers clinical solutions for the simplest and most complex arthroplasty procedures, and delivers on our mission to make healthcare better for surgeons and the patients they serve. With that, I will now turn the call over to Glenn.
Thanks, Preston. Today, I will focus my comments on our Q2 financial results and the related drivers. Our detailed financial results have been provided in today's press release. As a reminder, we are providing our comments in comparison to 2019 as it is a more normal baseline given the variability throughout 2020. Our organic sales growth was 9.3% in the quarter. The Q2 included the same number of selling days as Q2 2019 and Q2 2020. Compared to 2019, pricing in the quarter was unfavorable 0.6%. Versus Q2 2020, pricing was 0.5% unfavorable. Foreign currency had a favorable 1.5% impact on sales. During the quarter, we saw a recovery ramp of elective procedures and accelerated sales momentum as the impact of the COVID-19 pandemic has eased in most geographies.
However, the recovery ramp of elective procedures continues to be variable by region and geography, and has a more pronounced impact on our Orthopaedics and Spine implant businesses. For the quarter, U.S. organic sales increased by 7.5%, reflecting the recovery of our procedural business and continued strong demand for Mako, medical products, and Neurovascular products. During the quarter, we had strong sequential improvement in all our U.S. businesses. International organic sales showed strong growth of 14.2%. Our adjusted quarterly EPS of $2.25 increased 13.6% from 2019, reflecting sales growth and operating margin expansion, partially offset by higher interest charges resulting from the Wright Medical acquisition and a somewhat higher quarterly effective tax rate. Our Q2 EPS was positively impacted from foreign currency by $0.04. Now, I will provide some highlights around our segment performance.
Orthopaedics had constant currency sales growth of 26% and an organic sales growth of 6.7%, including an organic growth of 8% in the U.S. This reflects a ramp-up in elective procedures, especially in knees and trauma and extremities. Our knees business grew 7.5% in the U.S., reflecting the strong bounce back as the COVID-related restrictions were lifted. Other Orthopaedics grew 26.5% in the U.S., primarily reflecting strong demand for our Mako robotic platform, partially offset by declines in bone cement. Internationally, Orthopaedics grew 4% organically, which reflects sequential improvement as the COVID-19 impacts have started to ease in Europe, strong momentum in Mako internationally, and strong performances in Australia. For the quarter, our trauma and extremities business, which includes Wright Medical, delivered 7% growth on a comparable basis. In the U.S., comparable growth was 12.5%, which included double-digit growth in our upper extremities and trauma businesses.
In the quarter, MedSurg had constant currency and organic sales growth of 8.3%, which included 6.4% growth in the U.S. Instruments had a U.S. organic sales growth of 0.9%, primarily related to growth in smoke evacuation, lighted instruments, and skin closure products, partially offset by slower growth in power tools. As a reminder, during the Q2 of 2019, Instruments had a very strong growth of approximately 19%. Endoscopy had U.S. organic sales growth of 6%, reflecting strong performances in our sports medicine, general surgery, and video products. The medical division had U.S. organic growth of 13.4%, reflecting continued double-digit performance in our emergency care business. Internationally, MedSurg had organic sales growth of 15.9%, reflecting strong growth in the endoscopy instruments and medical businesses across Europe, Canada, and Australia. Neurotechnology and spine had organic growth of 15.5%.
This growth reflects double-digit performances in all four of our Neurotechnology businesses: CMF, neurovascular, neurosurgical, and ENT. It also reflects very strong growth in our neurovascular business of approximately 30%. Our U.S. Neurotechnology business posted an organic growth of 17.3%, highlighted by strong product growth in Sonopet iQ, bipolar forceps, MaxFacs, cryotherapy, and nasal implants. Additionally, our U.S. neurovascular business had significant growth in all categories of our products, including hemorrhagic, flow diversion, and ischemic. Internationally, Neurotechnology and spine had organic growth of 28.8%. This performance was driven by strong demand in China and other emerging markets, as well as Europe and Australia. Now I will focus on operating highlights in the Q2 . Our adjusted gross margin of 66% was favorable, approximately 15 basis points from Q2 2019.
Compared to the Q2 in 2019, gross margin was primarily impacted by business mix and acquisition, primarily offset by price. Adjusted R&D spending was 6.6% of sales, reflecting our continued focus on innovation. Our adjusted SG&A was 33.4% of sales, which was slightly better than the Q2 of 2019. This reflects our continued cost discipline and fixed cost leverage, offset by the impact of the Wright Medical acquisition. In summary, for the quarter, our adjusted operating margin was 25.9% of sales, which is 5 basis points improvement over the Q2 of 2019. This performance primarily resulted from our positive sales momentum, combined with the disciplined ramp-up in costs, offset by the dilutive impact of acquisitions. Based on our positive momentum, we continue to reiterate our op margin guidance for the year of 30- 50 basis points improvement over 2019, excluding the impact of Wright Medical.
Related to other income and expense as compared to the Q2 in 2019, we saw a decline in investment income earned on deposits and an increase in interest expense resulting from the additional debt outstanding for the funding of the Wright Medical acquisition. Our Q2 had an adjusted effective tax rate of 17% and was impacted by our mix of U.S., non-U.S. income and some adverse discrete tax items included in our provision to return adjustments. Our year-to-date effective tax rate is 15.2%. For the full- year, we expect an adjusted effective tax rate of 15%-15.5%, with some variability in the remaining quarters, including a slightly lower rate in the Q3 and a more normalized rate in the Q4 . Focusing on the balance sheet, we ended the consistency_review with $2.3 billion of cash and marketable securities and total debt of $12.7 billion.
During the quarter, we fully repaid the $400 million of term loan debt related to the borrowings incurred for the acquisition of Wright Medical. Year- to- date, we have paid down $1.15 billion of debt. Turning to cash flow, our year-to-date cash from operations was approximately $1.3 billion. This performance reflects the results of earnings and continued focus on working capital management. Now we'll provide a summary of our revised guidance. Based on our performance and sales ramp in the Q2 , as well as our capital orders pipeline, we expect 2021 organic net sales growth to be in the range of 9%-10%. As it relates to sales expectations for Wright Medical, we now expect comparable growth for trauma and extremities to be at least 6% for the full- year when compared to the combined results for 2019.
If foreign currency exchange rates hold near current levels, we expect net sales in the full- year will be positively impacted by approximately 1%. Consistent with the upper range of our previous guidance, net earnings per diluted share will be positively impacted by foreign exchange by approximately $0.10 in the full- year. This is included in our revised guidance range. Based on our performance in the first six months and including consideration of our improved full-year Wright Medical performance impact, controlled spend ramp to facilitate growth, and continued positive recovery outlook, we now expect adjusted net earnings per diluted share to be in the range of $9.25-$9.40. Now I will open up the call up for Q&A.
Thank you. We will now begin the question-and-answer session. If you have a question, please press star one on your telephone keypad. If you wish to remove from the queue, please press the pound or hash key. As a reminder, callers will be limited to one question and one follow-up question. Your first question comes from the line of Bob Hopkins of Bank of America. Your line is open.
Well, thanks, good afternoon. Congrats on such strong performance across the entire business. You beat on essentially every metric. I just have two questions, and I'll state them up front in the interest of time. The first question, Kevin, is for you. I'm just wondering how you'd kind of frame your thoughts on the outlook for your hip and knee business in the back half, given the rise in COVID cases that we're seeing. That's question number one. I'd love you to comment also as question number two on the acceleration in neurovascular. Maybe just give a little more color. I mean, was that market share you think? Was the strength in ischemic and hemorrhagic? Just kind of looking for a little more color on the acceleration there. Thank you.
Sure. Thank you, Bob. First on the hip and knee, what we're seeing is really a gradual increase. We've seen it throughout the year, of a return of elective procedures. These are deferrable procedures that need to be done at some point. Yes, with the Delta variant, you're starting to see pockets of disruption. Overall, the hospitals are very capable of being able to deal with this. We're seeing in markets like Latin America and other markets, the situation's actually improving. Overall, we know there's going to be some disruption. That is baked into our guidance. We believe with the momentum that we have across not only our implant business but as well as our capital businesses, we feel pretty confident enough to raise the bottom end of our full-year sales guidance. As it relates to neurovascular
If you look at that business, we had an outstanding Q1 . It was around 27%, so this is 30%. It's not really a huge acceleration. I would say we really have a great product cycle going on right now across flow-diverting stents, ischemic stroke, our hemorrhagic coils, our aspiration catheters. We really have the bases covered, and we're having fantastic growth, really globally, including terrific performances in Asia Pacific. I do expect that we'll continue to have very strong performance throughout the rest of this year.
Great. Thank you.
Your next question comes from the line of Robbie Marcus of J.P. Morgan. Your line is open.
I'll also add my congrats on a really impressive quarter here. Maybe two questions from me. One to start off, we saw nice performance down the MedSurg business and throughout medical. There's a lot of new product launches going on here. I'd just love to get a sense of what the key drivers are, how the ProCuity bed launch is going, and what you're seeing in terms of the capital equipment health of the market out there.
Hey, Robbie Marcus, it's Preston Wells. Just in terms of capital overall, we continue to see a pretty stable capital environment. I think we've seen that really through the first two quarters and really evidenced by the continued strong sales in medical, as you said, then also, of course, with our Mako technology. As it pertains specifically to medical, obviously we have the ProCuity bed, which I'll talk about in just a second, but we also have really strong performances out of our emergency care business, we've seen that in the last two quarters as well. That continues to be very strong, there's just been an uptick there, really in the U.S. and outside the U.S. With regards to ProCuity itself, the team is very pleased with how that launch has gone and started. We've really gotten a lot of awareness out there.
We certainly have a lot of engagement from our customers, we're starting to see a building momentum in orders and sales in the U.S., and starting to kick off that launch outside the U.S. as well. We really expect that ProCuity is going to continue to be a driver for medical, really for the remainder of this year and as we go into next.
Great. Maybe for Glenn or Kevin, whoever wants to take it. I know you guys don't guide quarterly, one of the concerns we've heard from investors over the quarter is that we're still in an environment without normal seasonality and concerns around maybe excessive weakness in Q3 from people coming out of lockdowns, vacations with doctors, et cetera. I was wondering how you're thinking about the progression from Q2-Q3 and Q3-Q4 and if we're already back to normal seasonality or when we might be able to expect that. Thanks.
Yeah. Thanks for the question. Robbie, as you know, Q3 tends to be seasonally our softest quarter, but I would assume that this year's seasonality will be very similar to what you've seen in prior years. The talk about vacation, I've heard some of those comments. I really think that's noise and that really that could delay maybe a procedure from one month to another month, but likely within the same quarter. I expect normal seasonality as you've seen in prior years.
Great. Appreciate it, Kevin. Thank you.
Your next question comes from the line of Chris Pasquale of Guggenheim. Your line is open.
Thanks for taking the questions. The update on Wright was encouraging. It certainly sounds like the upper extremities piece continues to do very well. Can you talk a little bit about what you're seeing in lower extremities? That was probably the more challenging piece to integrate. Curious how that business did versus 2019.
Thank you, Robbie. First of all, sorry, Chris. Thank you, Chris. First of all, I would say that the total ankle business did very well in the Q2 . As you know, the rest of foot and ankle is much more discretionary. The podiatric volumes are coming back. It was certainly a better quarter in Q2 than Q1, but it is lagging a little bit, just like we're seeing with spine and with hips and knees. It is a bit more elective, those foot and ankle procedures. I'm very pleased with the stability of our sales force, the leadership that we put in place, and as elective procedures comes back, we do expect that'll continue to grow. It was a market improvement. We're not seeing the kind of disruption we saw early on with K2M through that integration.
I'm very bullish on Wright overall, and as I mentioned in my opening remarks, delighted to have this company within our portfolio. I think I have a deeper appreciation. We knew it was a good company when we acquired it, and frankly, I think it's even better than we thought.
That's helpful. The color on Mako continues to sound very bullish, but the other Orthopaedics business probably didn't improve sequentially as much as the other pieces of the business. Can you help us sort of size the bone cement headwinds there and maybe give us a sense for what the Mako capital contribution look like?
Yeah. I mean, as you mentioned, Mako continues to be very strong, that was one of the businesses for sure over the last 12 months, really, we've seen continued strength. That's why you won't see necessarily that same sequential improvement that we're seeing on some of the other businesses. With regards to bone cement, of course, that's an area that has been declining, was certainly impacted by the pandemic, will be a detractor as we think about that overall category. We don't really provide a breakout of those, just thinking about it in terms of Mako continuing to grow and offset by some declines from a bone cement standpoint.
Thanks.
Your next question comes from the line of Anthony Petrone of Jefferies. Your line is open
Thanks. I'll also add another great congratulations on another great quarter. The first one for me would be on deferred backlog procedures. Some of your competitors, as recently even as this quarter, are sort of putting numbers against that, and I'm sort of wondering if there's a number internally at Stryker that you could share on, specific to the hip and knee business, what amount of deferred backlog is still out there, and how long do you think that'll be a driver for the business? The second one, I'll put up there as well on Wright. You mentioned, Kevin, H2 cross synergy selling potential into the H2 , and would assume that extends into next year. Just sort of trying to quantify that. Is that a couple of hundred basis points, and is that net of dis-synergies? Thanks again.
Yeah. First, with regards to your question on the deferred backlog, we don't have a specific number. There's a lot of variables that are going into trying to figure out what that is. What we do know is certainly over the last year that we haven't had the same level of procedures that we would've expected to as a result of the pandemic. Super hard to predict exactly which percentages of patients that are back are from that deferred backlog or that are new patients. What we do know is that surgeons are continuing to try to work through as many patients as possible, finding different opportunities to add capacity into the scheduling or into their opportunity to perform those procedures. We don't expect that we're going to see any sort of outsized growth figures that happen in any one particular quarter or month.
That's something that we would expect that we're going to be working through this backlog over the next several quarters. We expect it to be a tailwind for us, really over the next several quarters and into 2022 for sure. Thinking about your other question with regards to Wright Medical, the cross-selling component is something that, as I mentioned, we're pleased with the start of that. It's early in the process. We're expecting that, as you mentioned, to continue for the rest of this year and into next year. We haven't provided a specific size of that opportunity, but it's baked within the overall guidance that we've provided for the overall combined Trauma and Extremities business, which, as I mentioned, we expect to grow at least 6% compared to 2019. That also does include the dis-synergy component as well.
Okay, thanks.
Your next question comes from the line of Vijay Kumar of Evercore ISI. Your line is open.
Thanks for taking my question. Two from my side. Kevin, maybe on Mako. Is there a thesis to be made around utilization on robotic systems as having changed? Has the environment around utilization and how these systems are being used post-pandemic, has that changed at all? Have you seen an increase in that utilization?
Thanks, Vijay. We have not seen really any change in utilization post-pandemic. The gating factor really is being able to do the procedures and having the flow of the patients related to just the overall hospital operations. So far, we haven't seen any change. We are seeing a lot more demand for Mako in the ambulatory surgery centers. As you know, a lot of volume is starting to shift towards surgery centers, and for us, it's been a real tailwind. Our ASC offense is performing extremely well. There are a larger percentage of our Mako's that are going into surgery centers. That's been the only dynamic we've seen change. No real change to the procedure utilization.
That's helpful, Kevin. Maybe one for Glenn. Glenn, on gross margins here, I know you have price here in Q2, but even adjusted for mix here, it looks like your gross margins have held up much better, versus your peers who've been calling out shipping costs, manufacturing variances. It's also kind of reflected in the side guidance here, margins for back half, where the annual operating margins are about 2019 levels, which doesn't seem to be the case with your peers. Is there anything that's different about Stryker? Have you guys managed your P&L better, or I'm curious on what's driving the better margin performance versus your peers?
Yeah, I can't necessarily speak to our peers per se, but I will say, your question is maybe music to the ears of our GQO group, and they have put a lot of focus in driving improved margins and also driving really good fixed cost leverage. We will start to see that show up in our gross margins. We're still not guiding on gross margins, so I will say, we'll see that benefit, but we will also see the benefit of mix come through, which right now, Wright Medical is a little bit of that influence that we're seeing on the margins. Offsetting those, though, will be price, which typically is going to be the biggest thing. We'll still see that in the - 1% range for the full- year.
We fully expect that that pricing impact will be roughly offset by a lot of that positivity that we are seeing and also the mix factor related to Wright Medical.
Yeah, I'd just like to add one comment. As you probably are hearing across not just MedTech industry, but broadly, there is pressure on raw material input costs, and I'm delighted with the way that our organization has been able to offset those with a lot of other savings initiatives, efficiency initiatives, and purchasing initiatives, which has been kind of in the works for the last two years, but we've really built tremendous capabilities now. Something I haven't been able to speak about, frankly, in prior years, but we really have the organization humming right now, we are able to offset some of the challenges that others are experiencing, and we're also experiencing with electronics and some certain components, and feel really good about our supply chain resiliency.
Yeah, that's clearly showing up in the numbers here, Kevin, versus your peers. Thanks, guys. Congrats.
Thank you.
Your next question comes from the line of Matt Miksic of Credit Suisse.
Great. Thanks so much. One follow-up on robots, and I just had one question on just the sort of trends and mix that you're seeing in the U.S. knees in particular. On Mako, obviously, congrats on all the great results and momentum up sequentially off a very strong Q1. I was wondering if you could talk a little bit maybe about the color on any change in mix of placements versus sales or in particular, if you're starting to see any sort of cross effects between upper extremities and the robot as these two business lines kind of move towards convergence in that new application, whenever that comes, 12-24 months from now. I have one quick follow-up.
Hey, Matt, it's Preston. Just in terms of robots and mix, one of the things that we identified approximately a year ago was that we were starting to see a bit of a trend towards financing. We haven't seen any significant changes in that approach or in that mix for the last year. No big changes from a mix standpoint as we think about Mako and how we're selling Mako in the market. With regards to convergence, again, we're still not seeing anything there. We've talked a lot about our excitement of a potential with Mako and shoulder, but nothing new to report in that area at this point.
Okay. Just on the knee business, one of the things one of your competitors talked about was sort of a heavier mix in primaries versus revisions, I guess, given that revisions were a bit more of an acute, they are a more emergent procedure. More of those during the pandemic maybe than primaries in some areas. I wonder if you're seeing something like that or any demographic mix shift just because of what we've been through and the types of patients maybe that were getting knees six- nine months ago versus those that are coming through now. Any color would be great.
Yeah, Matt, nothing specific to report in that area. The one thing that we have seen throughout the pandemic is variability. Certainly by geography, by area, you're getting a lot of variability. Again, nothing that I would specifically point you to in terms of our mix.
Great. Thanks so much.
Your next question comes from the line of Joanne Wuensch of Citi. Your line is open.
Good afternoon. Thank you for taking the question. I have two, really. We've talked for years about the movement towards the ASC. Are you seeing that accelerate or the same, or is there any color that you can put around that?
Hey, Joanne. We've talked about this before. The pandemic did create an acceleration of a trend that was already starting with regard to the shift to the ASC. We would expect that to continue. We feel very strong about our offense and very good about our offense that we have with regard to the ASC and really being able to bring and leverage the full power of our product portfolio in that setting. We're very comfortable with that shift and certainly believe that we have the products to satisfy that shift and really be able to take advantage of that trend.
When you say you have the products for that shift, it's not just a robot, but I would assume that you're building out the whole ASC suite. Is that the right way to think about it?
Yeah, Joanne. The right way to think about it is we have virtually everything they need for an orthopedic surgery center, from building out the suites with the booms and the lights and the room design to the operating table, to the beds and stretchers that are required, to the power tools and the flight helmets that they wear. All the implants from foot and ankle procedures all the way to shoulder, including hips and knees, sports medicine procedures. Think about our portfolio. It absolutely covers the gamut of what they need in those surgery centers. That really makes life easy for an operator in ASC to be able to contract with one company to cover such a huge portion of the procedures that are being done. Our portfolio really lines up beautifully for that.
We also, you may have read recently that we have this deal with Conformis that we worked on a couple of years ago. We have started and launched our first few cases of a very simplified, streamlined offering that provides less sterilization. We call it kind of a knee in a box. The official name of it is Triathlon ASC with personalized cutting guides for the procedure. That was designed specifically for the ASC, and that's now launched. Frankly, a few years ago, we didn't realize that Mako would be this popular in the surgery center as it's proving to be. We now have both that we can offer because some surgery centers won't have a robot. Yeah, it involves a huge portion of our portfolio across some of our MedSurg products as well as our implant businesses.
That's helpful. Thank you. My second question has to do with M&A. In October, you're rounding the two-year mark on the announcement of Wright Medical. Does that change your thinking and timing or tempo? Thanks.
Yeah, Joanne. You're right. It is rounding the two-year mark on Wright Medical.
We're only nine months into the cash flow impact of buying Wright Medical. As we announced at the time of the acquisition, we were going to focus on debt reduction and sort of tuck-in kind of M&A. That really is what we've been doing, and you've seen it over the last nine months. We've paid down just a little over $1 billion of debt this year. We'll continue to look for opportunities to do that as we move forward. We're ahead of the schedule that we thought we'd be on for debt pay down, so that's good. Honestly, our BD teams are working and looking at smaller tuck-in M&A deals, which we think actually provide the most sort of shorter-term growth upside.
We're excited as they bring us new deals to look at sort of in that kind of size and category.
Thank you.
Your next question comes from the line of Larry Biegelsen of Wells Fargo. Your line is open.
Doug, good afternoon. Thanks for taking the question. Two robotic questions from me. First on Mako. I'd love to hear about the OUS rollout, new geographies, how that's going, places like Japan. I think you're waiting for China. Hopefully, I don't have those two backwards. Just color on the mix, U.S., OUS of Mako placements. I had one follow-up.
Thanks, Larry. Our OUS business has picked up. As you saw in the pandemic, the U.S. business continued very strong on Mako, but our OUS business did slow down. That's ramping back up again. We are fully operational with both Japan and China on all three applications, same with Brazil as well as Russia. Japan is really starting to accelerate, which we're quite excited about. China has started. It's a little bit behind Japan. Brazil, we now have our first few sales in Brazil, so that's probably one of the later ones, and Russia as well. We're in the early stages in those four markets. The demand is very high from surgeons, which is exciting. Brazil was delayed a little bit by COVID, we are starting to build momentum there as well. It's very exciting.
The surgeons, it's kind of taking us back to when we launched Mako Total Knee here in the U.S. There's high demand for it, and you should expect strong performances in the quarters ahead.
That's helpful. For my related robotic question, Kevin, you guys have started talking more publicly about having people at Stryker evaluating surgical robotics. My question is, how important is it for Stryker to participate in this market at some point? How do you want investors to think about the kind of investment that it might take to be competitive in that market? Thanks for taking the question.
Okay. Thanks, Larry. I assume by that question, you're talking about general surgery robotics.
Yes. Sorry about that.
Yeah, no problem. Just wanted to make sure that was clear. I would say there's really no need for us to be in general surgery robotics. As you can see, we're running a very good business at Stryker. It is a big market that has big growth potential, but it's something that, like other adjacencies that are attractive to us, be it areas I've spoken about in the past, like neuromodulation or peripheral vascular, this is an attractive adjacency. The pathway forward is not obvious and not clear at this time, but something we'll continue to look at. It's not something we have to be in. If the right opportunity presents itself and we think we can build a strong business, we'll certainly make a move, but not obvious at this point.
Thank you.
Your next question comes from the line of Pito Chickering of Deutsche Bank. Your line is open.
Good afternoon, guys, and thanks for taking my questions. The first one is, like, look at the guidance you provided. Can you give us color on where gross margins and SG&A should be exiting the year as a compare versus the Q4 of 2019?
Sure. I won't speak specifically to guidance on gross margin or necessarily SG&A. I guess what I can tell you is that as we look at gross margin, we probably would plan on more Orthopaedics business maybe impacting that gross margin. That will be dependent on continued ramp in those businesses. On SG&A, we aren't fully ramped in terms of what I would call a normalized spend. As we look to continue sort of fueling the growth as we ramp back up, we'll probably see increases in SG&A over the course of this year.
Okay. Great. We've spoken to a lot of hospital systems sort of during the quarter. They talked about a pretty significant move of orthopedics from inpatient to outpatient, but not necessarily into the ASC, uncertain that get a lot of investor attention. As procedures moved into the outpatient department of hospitals, does it impact surgeon selection of the products at all, or is it no impact from that move?
No, we're not seeing any impact on implant choice if they're moving to the hospital outpatient or even, frankly, to the surgery center. Thus far, we're seeing surgeons continue to operate with the same implants regardless of which facility they're operating in.
Great. Thanks so much.
Your next question comes from the line of Kaila Krum of Truist Securities.
Great. Hi, thanks for taking our questions. Just for Wright Medical, you're saying you're confident that the combined business will grow at least 6% this year. Can you just speak to any more detail around sort of the recent drivers in this business? Are you guys seeing any benefit from dislocation associated with the recent Integra spin-off? Then, I guess, is there any reason why that 6% couldn't be a 8%-10% growth next year?
Yeah. Thanks, Kaila. What I'd tell you is we're really excited about the upper extremities business. It was growing very, very fast before the acquisition. That's continuing to really sing, especially in the U.S., and we've just launched a new product which will provide extra fuel to the fire. On the lower extremities side, we knew that the foot and ankle was going to be a tougher integration, but it's going well. They're a little bit more elective, those procedures, but the total ankle is doing extremely well. Overall, the product portfolio is performing well. Our sales forces are integrating well. The U.S. integration's ahead of schedule. OUS is going to take a little longer, and we knew that. These countries take a little longer with the distributor arrangements that we have in place before they fully hit their stride.
If you recall, when we started the year, we said low- to mid-single-digit growth on a combined basis, then we sort of moved it up to mid-single, and now we're kind of thinking it's really going to be 6+% for this year. You should assume, if this continues and the elective procedures on the lower extremities ramps up, that we should have a very good year next year. Also our core trauma business is actually having a very good year as well. Overall, we are feeling very good about it. We're not going to give guidance to next year, but I think you can tell by our tone that we're feeling very optimistic about the future of our trauma and extremities business.
Great. Thanks, Kevin. Then, I guess just on the spine market, can you just compare or contrast sort of what you've seen in terms of how the recovery has progressed in this category? Maybe compare it with some of the other areas of Orthopaedics. Thank you.
Yeah, Kaila, just as we think about spine in comparison to other ortho areas, we haven't seen a significant difference in that recovery. I think I mentioned before, variability really being the key word, again, there's just been different pockets of disruption and opportunity as well. Nothing significant that I would say that we've seen in terms of the recovery for spine that's been different than what we've seen in our other elective areas.
Great, thanks.
Your next question comes from the line of Steven Lichtman of Oppenheimer & Co. Your line is open.
Thank you. Hi, guys. Starting first, can you talk about your spine business and how you are feeling about the state of that business? What's your outlook for the underlying growth, and what are your latest thoughts in timing on robotics into spine?
Yeah. In terms of underlying growth, I mean, we don't break out guidance in terms of as we think about Spine, but we do expect that market and that business to continue to accelerate as the recovery happens in the back half of the year. With regards to Robotics, I mean, we've talked about this before, is of our key areas of focus for Robotics and applications that are next, Spine is one of those. We continue to move down that path with a couple of different options, looking at Mako, but also through our Mobius acquisition and the Cardan robot, some opportunities there. We don't have a timeline that we are sharing at this point, and so something that we'll continue to update you on as we make progress in that area.
Thanks, Preston. Then just secondly, with OrthoSensor in the fold here for I think about six months, any updated thoughts on a smart implant coming from that acquisition?
No, nothing new to report at this point. I mean, obviously it's still fairly new in terms of the acquisition into the organization. We still do believe in smart implants and smart devices, that they will have a role to play in Orthopaedics. Similar as with robotics, as we get further down that pathway, it's something that we will certainly keep you updated on.
Got it. Thanks, Preston.
Your next question comes from the line of Mike Matson of Needham. Your line is open.
Yeah, thanks for taking the questions. This is David on for Mike. The first one, just on ASC, just given the different dynamic there, maybe there's more quote-unquote "windshield time." Does that ASC market need a separate sales force and strategy, or do you think you can leverage the current sales network?
Yeah. We have a very custom-designed approach to selling to the ASCs. It's not something we're going to elaborate on this call, but I would say it has required a different approach, and we're really excited about the way our offense is working in the market.
Okay, great. I guess on Mako, I mean, J&J talked about the VELYS launch in the U.S., just expectations over the next, call it 12- 18 months. Thanks for taking the questions.
Yeah. Well, expectations for us, I would say we expect Mako to continue to do very, very well. As you've seen with other competitive entrants into the market, it only validates that robotics is here to stay in Orthopaedics. We like our chances. We know we have an outstanding solution that delivers great results, which is why hospitals are buying their second and third and fourth Makos. We welcome the comparison. It's early days for them, and we just like the fact that robotics is going to continue to grow within Orthopaedics.
Great. Thank you.
Your next question comes from the line of Travis Steed of Barclays. Your line is open.
Hi, everybody. Thanks for the question. I realize China's a small part of your business, but just curious what you're seeing on the ground there with the China tenders and the volume-based procurements there. I think that was supposed to happen at some point here in the next few months. Didn't know if there was an update on that front.
Hey, Travis. Thanks for the question. In terms of the VBP in China, it is something that's ongoing. We don't have any major updates at this point as we're waiting on feedback on the process. I think one thing to note that you mentioned is that certainly China's a smaller part of our business, and then as we focus on the products that are actually potentially under the tenders, is an even smaller component of our business. Just something to keep in mind as we think about the overall impact that could be coming from VBP on our business. We expect to hear back something later in the Q3 , and at that point in time, we'll take a look at it.
The one thing that we know is just based on the timing, we don't expect it to have any significant impacts on our 2021 numbers, and so we'll continue to monitor, and it'll be something that we will contemplate as we go into 2022.
All right. That's helpful. Thank you. Just wanted to get an update on the Sports Medicine business specifically. I know you had been growing double digits. Just curious if there's any additional color you can add there, both in U.S. and OUS.
Yeah. Certainly OUS, it's a much smaller business. I would say within the U.S., the tailwind of the shift to the ASC and our ASC offense is, in addition to great cadence of new products, has really fueled very strong growth. We had a 20% growth in the Q1 in the U.S. in our Sports Medicine business.
Great. Thank you.
Your next question comes from the line of Matthew O'Brien of Piper Sandler. Your line is open.
Great. Thanks so much for taking the questions. Kevin, you mentioned this at least 6% growth in Trauma and Extremities. Is that the growth of the overall market? I know the E part of that is growing faster than the T part. Is that the overall growth in that overall category combined? As you think about going forward, typically that nine-18 month period is when you start to see the most dislocation from a product and a rep perspective. Is Trauma and Extremities different than what we see across traditional Orthopaedics acquisitions, just because there's fewer places for some of these reps to go? Maybe the dislocation that you see could be a little less than we typically see?
Yeah, I think the way things are playing out right now, the dislocation is less than Spine, certainly. That's been our experience. It's been a pleasant surprise so far, especially on the foot and ankle side where we had anticipated a bit more dislocation. Frankly, we have terrific products, and we provided really quick stability for our salespeople to know who their boss is, to know where their territory is. We moved with more speed this time, learned some lessons from prior integrations. I would tell you that we think we're growing at least at the market, if not above the market, because you have to remember that at least 6% is for the full-y ear, including a pretty depressed Q1 , right? The first quarter of this year was not kind of a normal year as it relates to the Extremities business at all.
To have that over the full- year, at least 6% on a combined basis, I think that's probably growing above the market, and we'll see as the year progresses. Feeling very good about both our core Trauma business and our Extremities business as well.
Got it. Thanks for that. Then over to Neurovascular, I know you don't want to call out this acceleration here in Q2 versus Q1, but you're doing much better than the overall market, by our calculations anyway. Are there specific areas that are accelerating? I know if it's ischemic specifically within that category, and that you're really well-positioned there. Then just, is your ability to bundle just much better than elsewhere? I guess the real question is, can this business grow upper teens, low 20s for the next couple of years?
Well, it's been growing at that kind of rate for the last few years, this year you are seeing an acceleration of growth. What I would attribute it to is we already have fabulous coils. Our stent retrievers were already very, very good. We've strengthened our portfolio with the flow diverting stent, with the Surpass Evolve stent, and with the 0.074 Vecta aspiration catheter. That for us was a product gap. We didn't have an easy-to-deploy uncertain approach for a flow diverting stent, and we didn't have a larger bore aspiration catheter. We plugged those, let's call them product gaps. We've had fantastic expansion around the world. Really, the Atlas stent in China as an adjunctive stent for hemorrhagic is performing exceptionally well. This global business is really, really well- run.
We have an exceptional leadership team over there that have been executing very well. I would say the acceleration, let's call it this year's acceleration versus prior years, is really driven by this product cycle that really has us covering all of the bases with excellent products that are meeting the needs of our customers.
Understood. Thank you.
Your next question comes from the line of Richard Newitter of SVB Leerink. Your line is open.
Thanks for taking the questions. Kevin, you mentioned several times just how impressed you are with Wright Medical now that you've kind of had it under your operating belt for a few quarters now. I'm just curious if there, other than just the integration going better than planned, is there anything specifically either in the pipeline or embedded in that comment that just really is surprising you to the upside or making you more excited about the future? You mentioned Blueprint a few times. Is something with Blueprint Just, I'm curious if there's something that you're foreshadowing there, or if it's just a general execution comment. Thanks.
Yeah. Listen, we knew they had a good business, and we knew that their culture was similar to Stryker's. There's been some pleasant surprises along the way. Their talent is really excellent, and a lot of times when we buy companies, we buy them for their products. Then we have to infuse a lot of our management. Their leader for upper extremities, their leader for lower extremities are leading our businesses. Our head of knees came from Wright Medical. We have an infusion of talent that, for me, has been a positive surprise. Really outstanding leaders. Their sales leader for upper extremities is outstanding. That's been one positive. The second I would say is their key opinion leaders.
They absolutely work with fabulous key opinion leaders on both upper and lower extremities. I would say that they're better key opinion leaders than we had within Stryker. Those are two really, to me, pleasant surprises. Just the pipelines, we thought they were good. They turned out to be a little better than we thought. That really applies across the board. There are certain things that you know when you do a public deal, you don't get to do the same amount of due diligence as you do with a private acquisition. Those instincts, we had instincts that things were going to be good. They're proving to be even better than we first thought.
That's helpful, Kevin Lobo. Thanks. Maybe just second question. Conformis and the initiative that you have there, I appreciate the ASC help that product can potentially offer the solution there and the benefits there. Just wondering where else the Conformis solution could go. I'm thinking kind of with an eye towards robotics and digital surgery as well. Would we be thinking about that being more meaningful going forward in other capacities outside of just ASC adoption? Thanks.
Our primary focus was on the ASC, but there are a lot of hospitals that are concerned about sterilization and sterilization being sort of a constraint, and they'd like less trays, they'd like less instrumentation, they'd like less space taken up in their stockroom. I wouldn't say it's limited to ASCs, but that it really is out of the gates, let's say, for the first six- nine months, our prime focus is going to be on the ASC because of their constraints on sterilization are the most acute. I would say that there probably will be interest beyond that. Let's see, that'll be more of a next year kind of commentary that I'd be able to give you.
Thank you.
Your next call comes from the line of Joshua Jennings of Cowen. You may proceed.
I was hoping to just follow- up on some of the commentary on the spine business, and can maybe just review your outlook on the value proposition of the current robots out in the market and maybe help us better understand the enabling technologies under Stryker's roof that don't get a lot of air time and how you believe Stryker's spine franchise can be competitive in front of the Mako spine launch.
Yeah, thanks. Listen, we're big believers in enabling technologies. We obviously have that with Mako. We did the Mobius acquisition, and we're very excited about the imaging aspect of that. We do have a gap in spine robotics, and we do believe that the first foray with the two competitive systems on the market today are really good guidance systems for the placement of pedicle screws, but it's providing value to surgeons, and we definitely want to have something like that on the market, which was what Mobius was working on. Beyond that, we think with Mako, we could get into other procedures and other applications. Robotics is difficult, so it's going to take time for us to develop those applications, and we'll keep you posted. We are big believers in enabling technology, and we're going to continue to invest in that space.
Thanks for that. Maybe one follow-up, maybe for you and Glenn. Just as you're moving towards the anniversary of the Wright acquisition, and hopefully, we're all moving towards more normalcy in 2022. You've had an uncertain operating margin expansion kind of range of 30-50 basis points. How should investors be thinking about these cost savings programs that have been played for the last couple of years and the amount of P&L leverage that Stryker can experience in the future? Thanks for taking the questions.
Yeah, sure. I think, first of all, as a baseline, if you think about the normal operating margin that was acquired through Wright Medical, it was significantly less than, say, Stryker's normal operating margin. If you think what have we worked on during this integration period, it was really pulling Wright Medical up and trying to look for all the synergies that we had built into our model so that we could drive better operating margins at Wright Medical. I think fast-forwarding into next year and looking at where that might look on a combined basis, I think we'll get back to our normalized op margin expansion of 30- 50 basis points. At this point, that's a little ways away, and we're not really necessarily guiding for 2022.
Your next call comes from the line of Kyle Rose of Canaccord. Your line is now open.
Great. Thank you very much for taking the questions. A lot's been asked, but we do have the AAOS coming up in a few months here, and I wondered if you could just touch on maybe what some of the focuses that investors will see at the conference. When I think about what's happened over the course of the last 12 months, you have acquired OrthoSensor. You did touch on a little bit on the knee in a box, ASC knee opportunity there. Obviously, robotics is getting a lot of attention in the ASCs in the outpatient setting. Maybe just level set us on expectations into the conference.
Yeah. Listen, we don't have a big reveal at this conference. As you say, we'll have the Conformis product that we can talk about Triathlon ASC. We have Mako, which is still going to be talked about quite a bit, especially with the new hip application that's starting to gain some steam, but still takes time to get that socialized more broadly. In addition to that, we have recent approval of the InSpace balloon for large rotator cuff repair within our sports medicine business, which is a very exciting product, and a product used by sports medicine surgeons as well as the surgeons that do shoulder arthroplasty that come from Wright Medical. That's also an exciting product. As well as the Perform humeral product that Glenn mentioned earlier on with Wright Medical.
A number of new products, but it's really, frankly, an exciting time to get back with our customers at scale. Not having that conference last year was certainly a gap, and really look forward to engaging with our customers once again. That's really what we're going to be showing. It's not something brand new that we're going to be unveiling, but really more of just continuing the momentum that we already have.
Great. The second question is, I think earlier you noted that when physicians do move procedures to the outpatient or the ASC, they're typically using their standard instrumentation sets or the same implant systems they use in the hospital. Have you seen any changes in pricing or types of contracting that you're seeing when your ASC team does go out to engage on driving the initiatives there?
No. Thus far, we're not seeing really any change in implant pricing. What we are seeing is, because of the capital requirement, we are seeing deals that involve multiple businesses of Stryker. We're seeing much more of that than we see in the hospitals. The deals that we do typically involve four or five different businesses of Stryker, whereas hospitals tend to buy product category by product category. No real change on pricing.
Your next call comes from the line of Matthew Taylor of UBS. Your line is open.
All right, great. This is actually Young Lee in for Matt. Thanks for taking our questions. Maybe just one question, just on smoke evacuation. You mentioned it for several quarters now. It would be great if you can talk a little bit about the drivers for growth in recent quarters and the sustainability of growth going forward, especially on the other side of COVID-19. Thanks for taking our question.
Absolutely. We're very pleased with smoke evacuation and what that business does for us in terms of our ability to grow. As we look at it, we really look at ourselves as market leaders behind our broad portfolio, and it's one of those businesses that actually sits across a couple of different divisions, both within instruments and also within endo, our endo businesses. In terms of what our expectations are, we're really going to continue to expand as that market continues to expand, both in the U.S. and outside the U.S., really driven by legislation and really the desire around a safer operating room behind smoke-free operating rooms.
Thank you.
Your next call comes from the line of Jeffrey Johnson of Baird. You may proceed.
Thank you. Good afternoon, guys. I'll be quick. Just one. Kevin, I'd be interested, it's always tough as an early reporter for you guys to know market share shifts and things like that, and the volatile numbers we're getting from everybody these next couple of quarters will be even tougher. I'm just wondering kind of momentum-wise that you're seeing with surgeons in your core ortho business. Can you talk to hips, knees, trauma, spine, any of those four areas where you've seen maybe a change at all, good or bad, in momentum you think of pulling surgeons in on a competitive front? That would be helpful. Thank you.
Yeah, listen, it feels good to be sort of getting back to normal. It isn't totally normal. There are these pockets of disruption. I would say that surgeons are starting to fill up their schedules. They're taking meetings with us. They're coming to trainings. We feel like we're sort of almost getting back to the kind of rhythm we had before. You can see it in our guidance. I mean, it's a pretty bullish guide to say we're going to do 9%-10% organic, plus strong performance out of Wright Medical, which was an integration that, pretty complex, involving the trauma extremities as well as our joint replacement business because those businesses used to be under common sales management. We've pulled those out. To be able to do all that and have this kind of wind at our back is pretty exciting.
I would say customers are ready to engage. AAOS I think will be a pretty big conference, and based on what I'm hearing, it'll be fairly well attended, and I think those are great opportunities for us to be able to show the power of Stryker and what we can offer to our customers.
Anything in those four core areas of Orthopaedics, though, where you're seeing kind of a change in your competitive positioning where just over the last three-six months or so, you may be feeling a little bit better or worse about your positioning in bringing in competitive accounts?
I would say more of the same. You look at that knee number. That's a pretty good knee number. That has been the killer application with Mako. Mako is very strong, as you saw through the pandemic, and I think that'll continue to be probably the one business that stands out. I mean, obviously, upper extremities is going to continue to be a very strong performer. I would say that's the one that probably we're feeling continued bullishness, if you will. There's not been really any other new dynamics just in the last quarter.
Yeah, makes sense. Thank you.
There are no further questions at this time. I will now turn the conference over to Mr. Kevin Lobo for any closing remarks.
Well, thank you all for joining our call. We look forward to sharing our Q3 results with you in October. Thank you.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.