Stryker Q2 2023 Earnings Call Transcript

Participants

Corporate Executives

• Kevin Lobo, Chair and Chief Executive Officer
• Jason Beach, Vice President, Investor Relations
• Glenn Boehnlein, Vice President, Chief Financial Officer

Analysts

• Robbie Marcus, JPMorgan Chase & Co.
• Larry Biegelsen, Wells Fargo & Company
• Pito Chickering, Deutsche Bank Aktiengesellschaft
• Vijay Kumar, Evercore ISI
• Matthew O'Brien, Piper Sandler Companies
• Ryan Zimmerman, BTIG Research
• Shagun Singh, RBC Capital Markets
• Eric Anderson, TD Cowen
• Matt Miksic, Barclays PLC
• Joanne Wuensch, Citibank
• Rick Wise, Stifel Nicolaus
• Travis Steed, Bank of America Co.
• Unidentified Participant
• Mike Matson, Needham and Company
• Richard Newitter, Truist Securities

Presentation

[Operator]

Welcome to the Second Quarter 2023 Stryker Earnings Call. My name is Todd and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Following the conference, we will conduct a question-and-answer session. This conference call is being recorded for replay purposes. Before we begin, I would like to remind you that the discussions during this conference call will include forward-looking statements. Factors that could cause actual results to differ materially are discussed in the company's most recent filings with the SEC.

Also, the discussions will include certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release, that is in an exhibit to Stryker's current report on Form eight-K filed today with the SEC. I will now turn the call over to Mr. Kevin Lobo, Chair and Chief Executive Officer, you may proceed, sir.

[Kevin Lobo, Chair and Chief Executive Officer at Stryker]

Welcome to Stryker's Second Quarter Earnings Call. Joining me today are Glenn Boehnlein, Stryker's CFO; and Jason Beach, Vice-President of Investor Relations. For today's call, I will provide opening comments, followed by Jason with the trends we saw during the quarter and some other updates. Glenn will then provide additional details regarding our quarterly results before opening the call to Q&A. In the second quarter, we delivered organic sales growth of 11.9% with double-digit growth in both MedSurg and Neurotechnology and Orthopaedics and Spine. This comprehensive performance demonstrates the diverse and attractive markets that we play in and our ability to drive growth through strong commercial execution.

We are also pleased with the continued positive outcomes of our globalization efforts. Our international business demonstrated strong performance with double-digit growth complementing our strong and fast-growing US business. In addition, we continue to see traction with our pricing initiatives again, delivering positive pricing in the second-quarter. During the quarter, we continued to realize improvements in component availability although disruptions remain in parts of our business. Our teams have demonstrated good agility in addressing these situations proactively mitigating much of their impact.

We delivered quarterly adjusted EPS of $2.54 a share, reflecting a 13% growth compared to the second quarter of 2022. This result was primarily driven from the strength of our sales, but also marks the beginning of our margin recovery. We expect margins to continue to expand throughout the remainder of the year. Finally, with happier behind us and our solid momentum, we have increased our expected full-year organic sales growth to a range of 9.5% to 10.5%. And increased our expected earnings per share to $10.25 to $10.45 per share.

I will now turn the call over to Jason.

[Jason Beach, Vice President, Investor Relations at Stryker]

Thanks, Kevin. My comments today will focus on providing an update on the current environment, as well as capital demand including Mako, acquisitions, and an update on product launches. Procedural volumes have largely recovered to pre-COVID levels in most countries and while volumes are strong, patient backlog still remains and we believe the elevated orthopedic procedural demand will continue well into 2024. While volumes have largely recovered hospital staffing pressures and supply constraints continue in pockets around the globe. These challenges are resolving gradually as we expected, and we will continue to be a moderate tailwind as we move through the second half of 2023 and into 2024.

Additionally, demand for our capital products remained healthy in the quarter as evidenced from the double-digit organic growth of our Medical, instruments, and neurocranial divisions. Also demand for Mako remains robust with strong US and international performances, which is helping drive our continued growth in hips and knees. Next capital order backlog remains elevated well-above normal levels. Also during the quarter, we executed a small tuck-in deal and also closed on the Cerus Endovascular acquisition.

Furthermore, our product super cycle continues to drive positive momentum. In late Q2, we successfully completed a limited launch of our 1788 camera platform and are poised for full launch in Q3. We also received FDA clearance for premium guidance, our newest application under our Q Guidance platform. This empowers surgeons to quickly plan a safe surgical approach using multiple imaging modalities and then navigate instruments with specific surgical procedures.

Finally, we remain on track for the launch of our life pack 35 defibrillator outside of the US in the fourth quarter of this year and in the US in early 2024. These launches will continue to support growth over multiple years. With that, I'll now turn the call over to Glenn.

[Glenn Boehnlein, Vice President, Chief Financial Officer at Stryker]

Thanks, Jason. Today I will focus my comments on our second-quarter financial results and the related drivers. Our detailed financial results have been provided in today's press release. Our organic sales growth was 11.9% in the quarter. The second quarter's average selling days were in line with 2022. The impact from pricing in the quarter was favorable by 0.5%. We continue to see a positive trend from our pricing initiatives, particularly in our US MedSurg and neurotech businesses, all of which contributed positive pricing for the quarter.

Foreign currency had a 0.7% unfavorable impact on sales. In quarter US organic sales growth was 12%, international organic sales growth was 11.4%, impacted by positive sales momentum across most of our international markets, particularly Australia, Canada, Europe, and most of our emerging markets. Our adjusted EPS of $2.54 in the quarter was up 12.9% from 2022, driven by higher sales and operating margin expansion, partially offset by a higher adjusted income tax rate and the impact of foreign currency exchange, which was unfavorable $0.03.

Now, I will provide some highlights around our quarterly segment performance. In the quarter MedSurg and Neurotechnology had both constant-currency and organic sales growth of 12.9%, which included 13.5% of US organic growth and 10.9% of international organic growth. Instruments had US organic sales growth of 12.9% led by strong double-digit growth in the Surgical Technology business. From a product perspective, sales growth was led by power tools, waste management, smoke evacuation, and surge account. Endoscopy had US organic sales growth of 3.5% against a strong comparable. This included strong growth in its ProCare sustainability and sports medicine businesses.

The Endoscopy business completed its limited launch of the 1788 camera late in the second quarter. Consistent with prior camera launches and the related transition period between the legacy camera and the new camera this also contributed to muted growth in Q2. Medical had US organic sales growth of 27.2%, reflecting very strong performances in all three of its businesses, acute-care, emergency care, and Sage and benefited from continued improvement in product supply during the quarter.

Neurovascular had US organic sales growth of 9%, reflecting a strong performance in our hemorrhagic business. Neurocranial had US organic sales growth of 9.6% which included double-digit growth in our bone mill bipolar forceps and Max space product lines. Internationally MedSurg and Neurotechnology had organic sales growth of 10.9% reflecting double-digit growth in our Medical and neurocranial businesses. Geographically, this included strong performances in Europe, Australia, and Canada.

Neurovascular's growth continues to be negatively impacted by VBP in China. Orthopedics and Spine had both constant-currency and organic sales growth of 10.6% which included organic growth of 10% in the US and 12.1% internationally. Our US knee business grew 10.6% organically which reflects our market-leading position in robotic-assisted knee procedures. Our US hip business grew 8.8% organically reflecting strong primary hip growth fueled by our Insignia Hip Stem and continued procedural growth.

Our US trauma and Extremities business grew 14.3% organically with strong performances across all businesses led by very strong growth in upper extremities and foot and ankle. Our US spine business grew 5.2%, led by the performance of our enabling technology and Interventional Spine businesses including the recently launched Q Guidance navigation system. Our US other Ortho declined organically 1.6%, primarily driven by the impact of deal mix changes, specifically more rentals related to Mako installations in the quarter.

Internationally Orthopaedics and Spine grew 12.1% organically, including strong performances in Australia, Canada, and most emerging markets. Now, I will focus on operating highlights in the quarter. Our adjusted gross margin of 63.9% was favorable, approximately 60 basis-points from the second-quarter 2022 and 70 basis-points sequentially compared to Q1 2023. This change was primarily driven by the slight easing of certain cost pressures, decreases in spot by purchasing, improved productivity and the benefit of price, partially offset by the impact of foreign currency exchange.

Adjusted R&D spending was 6.4% of sales, which represents an 80 basis-points decrease from the second-quarter of 2022, due primarily to a higher comparable in 2022 related to the ramping of costs for product launches. Our adjusted SG&A was 33.1% of sales, which was 70 basis points higher than the second-quarter 2022 due to a disciplined ramp of spend and investment to support our growth. We expect our full-year SG&A as a percent of sales to be in line with 2019 levels as we continue to invest for growth.

In summary for the quarter, our adjusted operating margin was 24.3% of sales, which was approximately 60 basis points favorable to the second-quarter of 2022. This performance is primarily driven by the aforementioned easing of certain cost pressures primarily on gross margins. Adjusted other income and expense of $66 million for the quarter was slightly higher than 2022, driven by increased interest expense. The second quarter of 2023 had an adjusted effective tax rate of 15 [technical issue] to be in the range of 14% to 15%. Focusing on the balance sheet, we ended the second-quarter with $1.5 billion of cash and marketable securities and total debt of $12.9 billion, approximately $100 million of the term-loan debt was paid down in the quarter, reflecting year-to-date payments of $200 million and the remaining balance of $650 million.

Turning to cash flow, our year-to-date cash from operations is $1.1 billion. This performance reflects the results of net earnings and higher accounts receivable collections. Considering our year-to-date results our strong backlog for capital equipment and continued positive procedural trends we now expect full-year 2023 organic sales growth to be in the range of 9.5% to 10.5% with pricing to be slightly positive for the year. If foreign currency exchange rates hold near current levels, we anticipate sales will be unfavorably impacted by approximately 0.3% and adjusted EPS will be unfavorably impacted from $0.05 to $0.10 per share for the full-year, both of which are included in our guidance.

Based on our performance in the first half of the year, together with our strong sales momentum we now expect adjusted earnings per share to be in the range of $10.25 to $10.45 per share and now I will open up the call for Q&A.

Questions and Answers

[Operator]

Thank you. [Operator Instructions] Our first question comes from Robbie Marcus with JPMorgan. Please go ahead.

[Robbie Marcus, Analyst at JPMorgan Chase & Co.]

Great, thanks for taking the question and congrats on a great quarter here. Two from me. First, great quarter. It looks like you're raising more than the beat on both the top and bottom-line. It looks like you've taken a good amount of share still in Ortho across hips, knees, and extremities trauma, just as we think about the balance of the year you touched on some of them, but would love to get a sense of what gives you the confidence these elevated trends are going to continue and any visibility on the margin side, that gets you comfortable moving it up more than the beat.

[Kevin Lobo, Chair and Chief Executive Officer at Stryker]

Hi, Robbie, it's Kevin. I'll start off with sort of the confidence in the procedures. We've talked about this since the third-quarter of last year. We can sense based on surgery backlog, talking to physicians, and seeing that there was pent-up demand through the pandemic. So we expect elevated procedures coming into the year, that has certainly played out. You've heard even similar comments from some of the providers in this space and the surgery backlogs are long. They are longer, probably a two-month surgery backlog is more like four months, and so that gives us confidence that through the end of this year and into next year we're going to continue to see elevated procedural growth.

We also see that in the demand for our small capital, which again are the equipment that's used for ongoing procedures, and then I'll turn to Glenn for margins.

[Glenn Boehnlein, Vice President, Chief Financial Officer at Stryker]

Yeah, hey, Robbie. As we got through the quarter, as I mentioned, we really started to see some positive and easing of some of the cost [Technical issue] that everything is rosy, we are still feeling inflationary pressures in transportation, some of our commodities, labor, certain electronics. But I will say that spot buys in Q1, spot buys in Q2 have not been material and we're getting near the amortization of the impact of spot buys from last year. So I feel like that gives me good confidence I think we'll see continued improvement in our gross margin as we move into Q3 and Q4. And so, we really will feel that gradual improvement and we'll feel it all the way down to the OP margin line.

[Robbie Marcus, Analyst at JPMorgan Chase & Co.]

Great. And maybe just a follow-up for me for both of you or however you want to take it, people are really happy so far with the year, but unfortunately, we're always focused on the future and looking out to next year already. You talked about, Kevin, these trends continuing, you have the super cycle in MedSurg, just any kind of thoughts on how we should think about these elevated trends continuing and thoughts I know you're laser-focused on getting back to your 2016 -- 2019 operating margin of 26.3%. How do we think about how far out that might be? Thanks a lot.

[Kevin Lobo, Chair and Chief Executive Officer at Stryker]

Well, I think to Jason's comments I don't have a crystal ball exactly what would that be a 100 basis points or 200 basis points more elevated than it was back through the pandemic last year. So, but we expect that to be elevated, the super cycle of products is widely exciting, something like look at the Neptune S is off to a great start within Instruments [Technical issue] is multiple year. We have the stair chair the expedition, amazing product at medical launch, brand new and it's a new category altogether that launched Q1 of this year that will continue into next year.

So a lot of continuation of really strong growth across our businesses. So you should expect we're going to continue to be a high growth company going into next year. And as it relates to margins. Let me just, sorry, let me finish. I forgot, it was a long question. So yes, we are absolutely committed to returning to pre-COVID margins and then growing our margins thereafter. This quarter marked a really important step, a very big first step in that evolution.

[Operator]

Thank you. We'll take our next question from Larry Biegelsen with Wells Fargo.

[Larry Biegelsen, Analyst at Wells Fargo & Company]

Good afternoon. Thanks for taking the question and I'll echo Robbie's congratulations on a very impressive quarter here. So, Kevin I wanted to start on MedSurge, the new products. Just talk about how the new camera in Endoscopy might have impacted Q2 and what you expect the impact to be from that in '23 and '24 and medical growing 27% organically after Vocera anniversaried, what drove that and how did Vocera do in the second quarter and what's the outlook and I have one follow-up?

[Kevin Lobo, Chair and Chief Executive Officer at Stryker]

Okay, you got a few in there already and you got a follow-up, but okay, that's fine. Listen, we're really excited about the performance of our MedSurg business, continues to be really a great segment of our company. What I tell you on the endo side is the camera had really no impact, it was a limited launch, really just making sure that the product is performing as we thought and the test cases have gone extremely well and really the full launch hasn't started, that will start in the back half of the Q3. So you should start to see some impact in Q3, that will accelerate in Q4 and that'll even accelerate more next year.

As you know, you've seen these launches in the past, so it really picks up year one sometimes even year two to be even higher than year one. So we're going to see a lot of impact next year, there'll be some impact in Q3, in Q4, but really it will start to ramp. So it's really no impact in Q3 on Endoscopy and that's why Endoscopy is a little bit softer, had a big comp from last year too, but at the end of these camera launches, you do see it start to slow down, and then it really picks up with the new product. Medical had an absolutely stellar quarter, another 25% plus growth and we had that in the fourth quarter, if you recall as well, and medical is really over the past six years has become a large consistent high growth division, it does move around a little bit from quarter-to-quarter, but overall, if you look at a rolling four quarters, rolling eight quarters this is a real high growth business.

Now I think it's probably one of the most misunderstood businesses, honestly, I would say underestimated business in our portfolio. You've got the integration of Sage, Physio-Control, Vocera which you referenced, but you've got new launches. Power-PRO 2 is a new ambulance caught at the beginning of last year, ProCuity bed frames still gaining steam, Sage has PrimoFit [indecipherable] that I mentioned. And then there's also a lot more awareness on safety. So our AED portfolio was a lot more awareness, so I would say, new demand for AEDs based on all the safety, the Lucas automatic chest compression product and really a fantastic management team in Medical. So, will I expect 25% again next quarter? Probably not, but I do expect that Medical will continue to be a very high growth business for a long-time to come and then specifically relatable to Vocera, it -- both sales and orders ramped in the quarter as we expected.

So you remember, we sort of talk to you about Q3 -- Q3, Q4 and Q1 of this year kind of being flat after we sort of went through the integration and we said it's going to pick up meaningfully, both picked up meaningfully in Q2, both sales as well as orders, and so they were also a contributor, but really strength across the entire portfolio.

[Larry Biegelsen, Analyst at Wells Fargo & Company]

Thank you. And just I'll keep my point really brief. Glenn, the comps are very different in Q3 and Q4, should we be thinking about stronger growth in Q3 relative to Q4, just a cadence for the rest of the year? Thank you.

[Glenn Boehnlein, Vice President, Chief Financial Officer at Stryker]

I mean, a couple of things. Q3 seasonally is usually not a super strong quarter, but I think if you focus on Q4 and you look at the comp that we're up against, that probably plays into how much we're going to grow against that comp. It's a big number last year, it was $5.2 billion in the quarter, which is a big number. So I think what you'll see is you'll see slightly higher growth in Q3 and then that will come down a little bit just because of the comp, but I think we'll end the year nicely, well within our guidance.

[Operator]

Thank you. We'll take our next question from Pito Chickering with Deutsche Bank.

[Pito Chickering, Analyst at Deutsche Bank Aktiengesellschaft]

Hey, good afternoon and thanks for taking my questions. Very nice quarter. A follow up on the medical, can you talk about the capex environment, how much has changed in the last 90 days or so [indecipherable] increase in capex as revenues and costs are looking pretty good for hospitals? And on the backlog, did you guys reduce the backlog in the quarter and was that a bolus for 2Q and should that be sort of normalizing back half of the year? And then also on microchips, is that -- should we view that getting better as a gross margin improvement from lower costs or increasing revenues as you reduce that backlog?

[Jason Beach, Vice President, Investor Relations at Stryker]

Hey Pito, it's Jason, I'll start here and then maybe some pile on. But as we think about the capital environment, we continue to see great strength from a capital environment standpoint. And even as you think about the backlog in our business, I think your question was there a bolus, but if you look at our backlog, it continues to be at very high level, higher than what we came into the year with. So still strength there on the capital side.

[Pito Chickering, Analyst at Deutsche Bank Aktiengesellschaft]

Okay. And then one more on gross margin, it sounds like a lot of tailwinds in 2Q were pretty much permanent in nature and you said that the gross margins improved in the back half of the year. Can you refresh us on how many months of inventory you guys have on the balance sheet and when those -- these -- the pressures we're seeing since are transferring to the P&L, just wondering if that's sort of the key driver of that gross margin improvement in the third and fourth quarter simply by duration or waiting for the transfer?

[Glenn Boehnlein, Vice President, Chief Financial Officer at Stryker]

Yeah, I think the big thing that really sits in inventory and works its way through sort of in the first quarter and the second quarter was the impact of those spot buys. And generally, inventory turns depending on the product anywhere from six to nine months. So, yes we will generally see the impact of spot buys reduce for the rest of this year. Keep in mind that we still have this sort of inflationary headwind that we will be working against in Q3 and Q4, but just the mere fact that I feel like we're getting to the end-of-the impact of spot buys, gives me confidence that we should see gradual gross margin improvement in the rest of this year.

[Operator]

We'll take our next question from Vijay Kumar with Evercore ISI.

[Vijay Kumar, Analyst at Evercore ISI]

Hey guys, thanks for taking my question. Kevin this guidance is pretty impressive 10% organic, are comps, something that we should worry about from a fiscal 24 perspective? I know you mentioned sudden tailwinds. Just help us contextualize that 10% and given that some of these procedure trends, it looks like it could sustain into 24?

[Kevin Lobo, Chair and Chief Executive Officer at Stryker]

Yes, thanks Vijay. Remember, we grew 9.7% organically last year so we had a pretty good year last year as well and we are growing on top of that, again, this innovation cycle we have is tremendous, procedure demand is strong as you see we're growing very fast, even though the global markets, elevated were growing above-market in virtually every one of our business. So that gives us confidence that we're going to continue to be able to grow at the high-end of MedTech and for this year already half of the year is already in the bag and yes, the Q4 last year was abnormally fast-growing over 13% so we in our guidance, we do reflect a little bit of a slowdown in the growth rate just related to those comps, but we do expect based on backlog of surgery demand aging population, more people playing pick a ball, you name it right, activity causing injuries. So this will continue to be a tailwind and we think through much of next year.

That's our current visibility and obviously that could change, but that's how we see it and we kind of called this, if you recall, Q3 of last year. We called that this is what we're going to see. It's actually materializing frankly a little better than we expected in terms of the flow through in procedures and-hospital staffing there, they're dealing with it much better than we expected, there are still flare-ups here and there, but it's certainly gotten better, hospitals are better equipped, and patients are anxious to get their procedures done.

[Vijay Kumar, Analyst at Evercore ISI]

That's helpful, Kevin. Glenn, maybe one for you, it looks like we're on track to do well north of 50 basis-points of margin expansion in fiscal '23. Is this something that's sustainable when you look at the operating model, assuming there is nothing crazy on the inflation side from next year. I'm curious how we should be thinking about leverage?

[Glenn Boehnlein, Vice President, Chief Financial Officer at Stryker]

Yes, you're going to force me to divulge all the things we want to tell you in our Investor Meeting, but I would say our old mantra of expanding 30 to 50 basis-points every year was absolutely doable and it's absolutely something that we we are planning on getting back to. We're working through some of these higher costs through the P&L there is this ongoing inflation that we will solve for, but I don't think that as we look forward over the longer-term that margin expansion is something that I think you'll continue to see out of this. I don't want to pinpoint a number just yet, but it's something we'll continue to have.

[Kevin Lobo, Chair and Chief Executive Officer at Stryker]

Yeah, one thing. I would add, so Glenn wasn't necessarily referring to '24 when he said 30 to 50, we're on a ramp and on a major focus to get back to that 26/3 and then thereafter, kind of get into a normal rhythm. So we'll give you more clarity around that at the Analyst Day in November.

[Operator]

We'll take our next question from Matthew O'Brien with Piper Sandler.

[Matthew O'Brien, Analyst at Piper Sandler Companies]

Afternoon. Thanks for taking the questions, and I really don't want to make too much out of one quarter here, but when I look at two-year stacked growth rate for you guys versus your biggest competitor in hips and knees, you have been outperforming massively the last several quarters, this quarter it really tightened up the delta between you two, specifically in knees. So I'm just wondering if there's anything you're seeing competitively maybe it's cementless or on the robotics side that you should call out or that we should think about as you go forward, just in terms of being able to significantly outperform the market in hips and knees over the next year or so?

[Kevin Lobo, Chair and Chief Executive Officer at Stryker]

Yeah, look, I'm actually pretty happy with double-digit growth in our knee business, and look at OUS, we're really starting to ramp the growth OUS, Mako is just getting going, it's really getting started. So that massive outperformance you saw before was on the backs of Mako and cementless and we're probably going to see some of that outside the United States and the U.S. performance was very strong. One quarter, I'm not going to get overly excited, we're still the fastest growing hip and knee company. And if you remember from the past, it used to be if you grew well in one you didn't grow well in the other and we covered both hips and knees, it wasn't hips or knees, hips and knees in Q2. So no, we're not seeing anything materially different. We focus on our own execution with our market-leading robotics and our strong portfolio continue the rollout in Insignia which has been an absolute home run. We're going to continue to perform very well.

[Matthew O'Brien, Analyst at Piper Sandler Companies]

Appreciate that, Kevin. And then on the pricing side, I know it's now flipped from kind of the headwind this year to a tailwind, but I'm assuming we're working through some of those benefits. So, is pricing going to be another tailwind or positive for Stryker into '24 and even '25 as well as you get to these long-term contracts? Thanks.

[Jason Beach, Vice President, Investor Relations at Stryker]

Yeah. I think I'll make some couple of comments around that about may be providing exact guidance on 2024. But if we look at the initiatives that we executed this year, we had a very targeted program that look to kind of product-by-product. And in general, what we're seeing is MSNT is generally gaining positive price. And I would say, Ortho is less negative and has much larger longer-term contract negotiations. Keep in mind too that our price comparison that we report on includes sort of same product sales compared to prior year. So if you think about increases that we gain on prices, say, on Next-Gen products that we're going to launch, that's not necessarily included in the number we say for price. But I would tell you that we generally see meaningful price increases on these Next-Gen products, especially when we bring newer technology to the market or a feature set that currently isn't provided. So I do think that we'll continue to see price as a tailwind, it's a muscle that we've certainly grown this year, and I think it's going to be part of our game plan for sure.

[Operator]

Thank you. We'll take our next question from Ryan Zimmerman with BTIG.

[Ryan Zimmerman, Analyst at BTIG Research]

Hello, thanks for taking the question and congrats on a really nice quarter, guys. I wanted to ask Kevin a little bit about the Cerus deal and neurovascular, it was slower before but 9% organic growth in the U.S. is really nice to see, especially in hemorrhagic. When we look at what Cerus has done in the UK, it's been pretty impressive, and so I'm curious kind of what your expectations are for the contribution in the U.S. and when we start to really see that in numbers especially if you're doing 9% U.S. organic growth in neurovascular?

[Kevin Lobo, Chair and Chief Executive Officer at Stryker]

Yeah, so the first thing I'd say is that Cerus is not yet approved in the United States. So that 9% growth had no benefit from Cerus, right, so I think you know that. I just want to make that clear to everybody that the trials are ongoing right now and we look forward to that approval in the United States. We've launched two new products, we had a tetra small coil as well as 46 catheter -- 46 size catheter -- vector catheter. So two new products that helps in terms of driving the hemorrhagic growth and the U.S. has been a little bit of a challenge for us more if you look back at the last few quarters, I'm really pleased to see that step up in this quarter and we're very excited. We closed the deal, obviously, it was during the quarter, it hasn't had -- it didn't have a big impact at all, but there's a lot of excitement. The product we know performs extremely well based on what's happening OUS and we can't wait for the approval, it's definitely going to be a shot in the arm when it does happen in the United States.

[Ryan Zimmerman, Analyst at BTIG Research]

Yeah, no question we saw that at SNIS this week. Wanted to ask the follow-up on robotics, we didn't hear you say much on your shoulder and spine programs, and just given that there is some other commentary out there from competitors about kind of shoulders and spine, what's your latest thinking about potential timing, launch cycles and so forth on Mako shoulder and/or spine? Thanks for taking the questions.

[Kevin Lobo, Chair and Chief Executive Officer at Stryker]

Yes, great. Nothing new to report, we're kind of on schedule with what we had said before, spine in the back half of next year and shoulder towards the end of next year. And frankly, we're not really concerned about competitive activity in this space. We already know Globus and Medtronic have robots and Spine, we are really excited about our in overall enabling technology starting with Q Guidance. We have an additional product that we'll be launching and Mako spine. So by the end of next year, will have a really compelling suite of enabling technology tools for spine, which we are really excited about. If someone else's first -- and shoulder it doesn't concern me in the least. We have blueprint already we already have a very powerful enabling tech platform for shoulder whether its patient matched ID, whether it's using HoloLens to do the procedure with virtual reality, whether it's a blueprint technology, which is amazing. And we're going to use that amazing blueprint technology to feed Mako, and that will just be icing on the cake on an upper extremity business that is clicking on gas right now with amazing growth quarter-after-quarter after quarter.

[Operator]

Thank you. We'll take our next question from Shagun Singh with RBC.

[Shagun Singh, Analyst at RBC Capital Markets]

Thank you so much. I was just wondering if you could refresh us on your capital allocation priorities and M&A just in terms of deal size valuation and areas of interest? And then on the product side, if you could just touch on trauma and what's driving the strong growth there and the durability? Thank you.

[Kevin Lobo, Chair and Chief Executive Officer at Stryker]

Yeah, sure. So as we've said in the past, we are first focused on capital allocation, right now is paying down debt, given the debt that we built up on Wright Medical as well as Vocera that does not stop us from doing little deals, we did one small deal within Instruments and then we closed on Cerus. So we're still looking at tuck-ins primarily this year, but the deal teams are all very active, they're having discussions, they're out building their lists and they're all really having nice pipelines. And so, as our cash position gets strong again, we'll be back on offense, that will be the first use of our cash. I mean, we had a really terrific track record of M&A and we can't wait to be able to get back on offense with M&A, but first priority is certainly paying down debt at the moment and we're doing that. So for the second part -- trauma.

So, trauma, I'll tell you this Wright Medical acquisition has been spectacular. The upper extremities business is growing very strong double-digit growth every quarter. Foot and ankle really starting to pick up, so we're really excited about the performance, this quarter was terrific. And foot and ankle strong double-digit growth. And then the core trauma has actually been a big beneficiary of Wright Medical. So in the past, our core trauma business was really diluted in its focus, it was focusing on foot and ankle, focusing more on extremities because they're faster growing and we were sort of not paying as much attention to core trauma. We had a great leadership team on core trauma with now dedicated focused R&D resources and obviously, they launched Gamma4, we had the T2 Alpha product launch, we're going to have a PeriPRO products launch soon, excited about some other innovations we plan to show at OTA later in the fall. So really refreshing the portfolio, great focus on core trauma and they had a really excellent quarter as well. So, all three business units performed very well in the quarter. And again the Wright Medical deal, it's not just benefiting our extremities business, it's actually providing more focus on core trauma, which is fueling terrific growth in core trauma. So, trauma, we expect to continue to be a very high growth business for a long-time to come.

[Operator]

Thank you. We'll take our next question from Josh Jennings with TD Cowen.

[Eric Anderson, Analyst at TD Cowen]

Hi, this is Eric on for Josh. Thanks for taking the question. I was curious to hear your thoughts around smart implants, one of your competitors is moving closer to a full launch of a smart implant technology and was just curious to hear your updated thoughts there? And if there are any updates to share from your work around OrthoSensor that would be great to hear as well?

[Kevin Lobo, Chair and Chief Executive Officer at Stryker]

Yeah, listen, I think smart implants is interesting. We obviously have MotionSense, which is wearable on the outside to measure, they have basically similar dynamics that are going to be measured from the smart implant. So I think range of motion, all these factors, it's interesting. We're not quite sure yet what to do with that data, how compelling that will be, will that affect patient selection, will it affect approaches to procedure, so I would call it, something that is more investigational and more of a learning that we're going to have. But I do think it's something that could be important in the future. So not discounting it, don't have anything more to share on OrthoSensor rather than we are -- we have launched MotionSense, which is the wearable which attaches to both the femur as well as the tibia to track mobility and a range of other metrics and we're going to learn a lot, we will and so will others in the industry about what is it that really matters and that you're measuring in the post-surgery period and really how does that affect the patient care, maybe patient selection, maybe what implants they should be using, is there a feedback loop that's meaningful. We don't have answers, we have a lot of questions and it's going to give us new data that we can then learn from. So that's how I'd characterize at the moment.

[Eric Anderson, Analyst at TD Cowen]

Understood. Thank you.

[Kevin Lobo, Chair and Chief Executive Officer at Stryker]

Thank you. We'll take our next question from Matt Miksic with Barclays.

[Matt Miksic, Analyst at Barclays]

Hi. Thanks for taking the questions. I wanted to ask a question on Mako, one of the comments that you made that this came up already back and forth like a lot of folks denied in the different calls, but you mentioned an increase in deal mix. I guess an increase in rental deal mix affecting the dollar revenues that looking at the Mako in other -- this quarter, and that's something we've heard from other folks as well as you're I'm sure aware in terms of robots more sort of taking flexible option to leasing managing go arrangements for robot. First, I'm wondering how tightly correlated that's with sort of growth in the ASC?

And then second in the past, Kevin, I think you talked about like early on was some hospitals or capital with some hospitals are operating conversion having downloads or whatever those different hospitals have a different preference on how they want to pay for a lot of that, that was sort of like how we used to think about this. I'm curious whether you're seeing some hybridization of that, in other words, we wanted another Mako. So you could pay for it, but let's scale into it whether lease arrangement or something, I'm wondering if you're seeing that kind of shift in the market? I have one follow-up, if I could.

[Kevin Lobo, Chair and Chief Executive Officer at Stryker]

Yeah, sure, thanks. So what I would tell you is the ASCs growth is obviously increasing in the ASCs with Mako and virtually all of the ASC deals are financed because physician ownership is part of the ASC scenario, they don't have the capital budgets for hospitals. So, yes, as ASC penetration increases, more financing rental type deals automatically going to happen because they're virtually all financed ASC.

To your question around the hospital dynamic, I think it's just -- if you have competitive systems that are not sort of being charged for, then hospitals as well, maybe I don't need to spend the capital even if I have the capital and maybe let me talk to you about what you do. And so we offer them the full suite and yes, some are opting to go for the financing route that maybe in the past would have purchased, but we have a healthy order book and we're not really agnostic to whether they want to buy by cash or whether they want to finance it, it really doesn't matter to us because we get the value from that whether we get the value on cash on day one, I get the cash over time it doesn't really concern us, and it certainly has been fuel for our strong implant growth.

[Matt Miksic, Analyst at Barclays]

That's great. And just quickly on, you mentioned the Endoscopy layer and the camera and not really having an effect yet, but quite differentiated and quite different this cycle with the sort of opportunity to test surgical margins around tumors and things that really represent kind of a new phase of camera and imaging functionality. Any sense, I know it's early, but of what that does to the shape of this product cycle versus what we've experienced in the past and your fluorescence imaging was pretty big for you, in the last launch this sort of takes that up a notch, any color you can provide in terms of what your expectations are and the early interest et cetera on the camera side? Thanks.

[Kevin Lobo, Chair and Chief Executive Officer at Stryker]

Yeah, thanks. Look, it's a little early still for me to get too ahead of myself, but the fluorescence imaging was a big deal, right, in -- first in 1588 and then 1688 when you had the overlay on fluorescence where you didn't have to toggle between black and white and fluorescence. Those are -- that was pretty meaningful. So those are pretty big steps, but you're right, with the tumor margin ability, the ability to use new dyes beyond ICG widely exciting to get into lung, to get into bladder, this is really, really exciting with new pharmacological agents. It's also of camera that is extremely good in neuro and sportswear. Historically, we weren't as strong, we had -- it was fabulous for general surgery but not quite as good as camera addresses those issues. So I'm really excited about it, but it's a little early that the test cases have gone very well, I wouldn't expect this to be any less performing than our prior launches potentially could be even more the feedback so-far is pretty exciting. And yes, this we have some really good features in this.

[Operator]

Thank you. We'll take our next question from Joanne Wuensch with Citibank.

[Joanne Wuensch, Analyst at Citibank]

Thank you very much. I apologize there's a lot going on tonight, but your operating margins are really impressive. And I'm curious how we should think about those for the back half of the year. And if you can give a full-year guide on it or even how we should think about this into next year, if you're willing to wait that far? Thank you.

[Glenn Boehnlein, Vice President, Chief Financial Officer at Stryker]

Yeah, Joanne. Yeah, we really if you think about operating margins, especially our performance in Q2, we saw really sort of good improvement honestly in gross margin. Just in terms of some easing of some of the cost pressures. As I've mentioned before, spot buys are not material. They weren't material in Q1, and they are not material in Q2. I think the other thing too that we're feeling, it's just that now that we have more evening of supply. We're also back to sort of better productivity gains and so all of those things give us good confidence that. We should see gross margins improve in the back-half of this year. And will gradually improve, because we're still feeling some of this inflation. But that kind of gives us the confidence and obviously some of that will roll into next year. As you think about our performance for next year, but we at this point, we're not going to guide on that other than to say that we do think we'll see some gradual improvement for the rest of this year.

[Joanne Wuensch, Analyst at Citibank]

Maybe this is an analyst question at the meeting or the next time you gather this altogether for an update, but how do you think about in a more normalized post-pandemic environment sort of operating margin expansion on a regular go-forward maybe even year-over-year basis? And thank you for taking my questions.

[Kevin Lobo, Chair and Chief Executive Officer at Stryker]

Hey, Joanne. Earlier in the call, I think this question was asked, I'll just repeat that we are laser focused on, I would say, trying to sprint back to the 26/3[phonetic] that we had in 2019. And so we're going to try to move margins on a more ambitious way to get back to that. And then once we get back to that kind of level, I think you're going to see us wanting to expand margins in a kind of a more consistent way. I don't know the exact number, something like 50 bps, we'll get more specific as time passes, but it would be what more like an annual more moderate nice progression year after year after year, especially with this kind of high growth that we're experiencing organically, you're going to expect to see more normalized margin expansion. But in the meantime, we're looking to move at a faster clip, given the fall off that we've had since '19 and try to restore those margins.

[Operator]

Thank you. We'll take our next question from Rick Wise with Stifel.

[Rick Wise, Analyst at Stifel Nicolaus]

Good afternoon, Kevin. Hi, everybody. Kevin I was hoping you would just give us a little more color and perspective on really your very solid international performance double-digits obviously almost as strong as U.S. performance, it was a little slower than the first quarter's at pace, you highlighted the strong emerging markets. So, I'm going to press one question with a couple of parts, how sustainable is this, you talked about some of your key initiatives and maybe just your perspective on the sustainability, what's the drivers here and maybe where we are in terms of procedure volume recovery back to normal in Europe just in a larger picture sense? Thanks so much and great to see the excellent quarter.

[Kevin Lobo, Chair and Chief Executive Officer at Stryker]

Yeah, thank you. Look, international has -- it took us a while, but the last five years, international growth has exceeded the U.S. growth. Now, obviously the U.S. growth this quarter was pretty spectacular. But we're absolute believer and continue to have very good international growth in the years ahead. Frankly, making up for lost time because our market shares are still below what we have in the U.S. and most of the international markets. And so, we have significant upside in front of us. Procedure volumes are pretty much back to normal everywhere, they're back to normal in Europe, they're back to normal in Australia, they're back to normal pretty much in Japan. So the market that hurt us frankly in the quarter was China.

So China continues to be a drag because of VDP both in neurovascular having an impact also impacting our spine business. So China continues to be a bit of a drag, but in spite of that, we had really terrific growth in international. And I'd say that Mako is really starting to pick up steam in Asia-Pacific. So we already have a pretty good presence in Europe, but in Asia-Pacific, Japan, India, China, it's really starting to pick up and I think that's a great leading indicator that will produce really terrific growth both in hips and knees for many quarters to come as that momentum continues. And then as well the camera launches of 1788 that's also really exciting for the international market. So we're going to continue the progress -- even Europe had another strong quarter, that's just kind of expected now.

It's steady and strong growth every quarter and we're still not where we'd like to be in Europe. So this is just one of those things that takes time, but if you think about something like cameras, where we started the Trans-Atlantic model, we were number five or six and we expect to take over number one sometime this year. Our power tool share was in the low 30%s and it's crossed 50%, but it's still not where it is in the United States, it's not where it is in Australia. So international should be something that continues in a very steady way just as it has for the last five years, it's been kind of very consistent. And in emerging markets that's the area where we have the most opportunity where we're still very, very small, growing nicely but off a small base.

[Rick Wise, Analyst at Stifel Nicolaus]

Thank you so much.

[Operator]

Thank you. We'll take our next question from Travis Steed with Bank of America.

[Travis Steed, Analyst at Bank of America]

Hey, thanks for taking the question. I'll ask [technical issue] upfront. Some of the players or providers have talked about a slower July, but I was curious if you could help frame some of the summer seasonality, if you're seeing more normal seasonality or how it kind of compares going through some of those care comments? And then a margin question for you Glenn, just curious if we should view the second half operating margin this year kind of a move jumping off point since this is the more normalized cost environment in the second half? Thanks a lot.

[Kevin Lobo, Chair and Chief Executive Officer at Stryker]

Listen. Sorry, your sound quality was a little hard to hearing you. I think you're asking about July, if we saw something strange seasonality in July. We don't normally comment on one month, and I would tell you, you saw our raised guidance like we're expecting a pretty good second half of the year and I don't really want to get into one month and there's -- sometimes you do have certain dynamics that happen, but there's nothing really important that I want to call out for the month of July. And then I think the question -- second part was margins.

[Glenn Boehnlein, Vice President, Chief Financial Officer at Stryker]

Hey, Travis Can you repeat that in terms of the operating margin question.

[Travis Steed, Analyst at Bank of America]

Yeah, sorry. Just curious if the second half of this year is kind of a new jumping off point for margins going forward, just given this is the more normalized cost environment in the second half?

[Glenn Boehnlein, Vice President, Chief Financial Officer at Stryker]

Yeah, I would say, a couple of things. First of all, Q4 is always seasonally higher, it's our highest up margin performing quarter. So, I wouldn't necessarily say that that should be the jumping off. I think if you back up from where our guidance is, you could sort of figure out kind of where we're angling to end the year at and that would be the good jumping off point.

[Travis Steed, Analyst at Bank of America]

Great. Thanks a lot.

[Operator]

Thank you. We'll take our next question from Danielle Antalffy with UBS.

[Unidentified Participant, at Stryker]

Hi, this is [indecipherable] on for Danielle. Congrats on the strong quarter. Can you talk about some of the puts and takes to the underlying Ortho market growth when you look at factors such as pricing, innovation, and potential trend towards treating both much younger and older -- much older patients? And I have one follow up.

[Kevin Lobo, Chair and Chief Executive Officer at Stryker]

Yeah, look the trends aren't different than what we've seen in the past. It's surgery demand, backlogs of surgeons that people -- frankly the older patients who have been -- now really want to get procedures done there are more active people out there as I kind of referenced earlier, who want to get their procedures done. So innovation wins the day, right. So the robotics continues to be a real terrific for us and we continue to see increased utilization, percent of Mako procedures done continues to rise, percent of cementless continues to rise, percent of hips being done on Mako continues to rise. So that's not new, those are continuation of prior trends and so it isn't some kind of new dynamic, it's just the pent-up demand of patients that we kept waiting for that are now coming and they're going to continue to come for some period of time and the aging population -- people every day from 10,265. So there is demographics that are on our side, there is the hangover from COVID that's on our side and for Stryker we have a portfolio that we're really excited about in addressing the direct anterior with our Insignia stem was critically important and we've done that and we're seeing fantastic uptake of that hips done which is driving terrific growth in hips.

So that's kind of new for us, if you look at the last year, our hip growth has really picked up and that was really because of the product that we launched really addressing an important and growing segment of the procedures in hips.

[Unidentified Participant, at Stryker]

Thanks so much. And just one follow-up really off of what you were just talking about. Looking at the competitive position in large joints in the United States, how do you expect to continue driving share gains and where do you see yourself given continued innovation?

[Kevin Lobo, Chair and Chief Executive Officer at Stryker]

Look, we really like our chances, but huge demand for Mako hasn't stopped. We know we have the best system on the market, which we're really excited about. We've filled our gap with Insignia on the hip side. We have an awesome 3D printed hip cup [indecipherable]. We have the cementless offering which of course they're way ahead, a huge head start on cementless, terrific publications coming out, excellent five-year data on cementless which will give surgeons even more confidence on that in the future. And so there's other things the team are looking at, we have some really exciting products on -- a hinge product that we're going to come out with later this year to show our provisions and that's pretty exciting.

We have plans to have revision on Mako as well in the not-too-distant future. So we're not going to sort of sit tight just everything we've already done. There are incremental additions -- we just -- not so long ago launched a 2.0 software for Mako to improve the user experience, improve the training of residents. And so we think we have a winning hand and we're going to continue to play that hand.

[Operator]

Thank you. We'll take our next question from Mike Matson with Needham and Company.

[Mike Matson, Analyst at Needham and Company]

Yes, good afternoon. I want to ask one about the Q Guidance System and Spine, it sounds like it's doing well. I'm just wondering if you could maybe give us sort of an overview as it -- I know you've had navigation systems planned before, is this something kind of different or is it more just the latest version? And then how does it kind of fit in when you do bring Mako into Spine?

[Kevin Lobo, Chair and Chief Executive Officer at Stryker]

Yeah. What I'd tell you is, this has the fastest camera on the market, homegrown we didn't use the third-party to do this camera, it is lightning quick and that camera will eventually be put into the Mako as well so that Mako will have that same terrific camera. It really -- the user experience is terrific in terms of being able to see and be able to do your procedure. So the feedback we've gotten is outstanding. So we've always been good at navigation, but this is sort of really putting our best foot forward and this user experience that you're going to have with Q will transfer to the Mako spine, and that we're really excited about.

So this is a -- even before Mako is already having an impact and we think once Mako has launched it will really fill this important need in the market for us to have a robotic application. We also have another product in enabling technology coming out of our Instruments division, that's going to be used by the Spine group [indecipherable] you details on what that is, but at the appropriate time, we'll tell you about that. So that combined with Mako is going to give us a very compelling enabling technology platform for spine.

[Mike Matson, Analyst at Needham and Company]

Okay, got it. And then just given the guidance, I think this is early kind of material issue, but I thought I'd ask about it anyway because we've heard about it from some other companies, but can you just comment on any Russia exposure you have and whether or not there's -- the latest sanctions are having any sort of impact on your business?

[Kevin Lobo, Chair and Chief Executive Officer at Stryker]

Yeah, obviously, we are abiding by all the sanctions as you would expect and working in lockstep with the industry on an industry-wide response to what should be humanitarian products and should they be -- should they go through the approval process, that's obviously very lengthy. It had -- it did have a negative impact, but honestly, our Russia business is so small that it's kind of meaningless in the overall picture of Stryker, but yes we are abiding by the sanctions, yes it did have a negative impact, but it was really -- it's not a material business for Stryker.

[Operator]

Thank you. Our last question will come from Richard Newitter with Truist Securities.

[Richard Newitter, Analyst at Truist Securities]

Hi. Thanks for taking my question and congrats on the quarter. Kevin I think a few months back in the first quarter, you were asked a question at the investor conference about what areas could be of interest to you? There's so much going right across your existing businesses. So obviously, M&A though is still top of mind. So I'm just curious kind of where are the holes and where do you think the investment could be most incremental for you?

[Kevin Lobo, Chair and Chief Executive Officer at Stryker]

Look, it's a good question. I think I've talked about the adjacencies that we're interested in. First and foremost, there is a lot of tuck-in demand. Each of our businesses are building their wish-lists and sort of evaluating different targets and I think that's job one is looking at those near-term targets that tuck-in, those create tremendous financial returns for Stryker. They don't always move the needle for the overall growth but they're really terrific financial deals for us to do and when you feed our existing sales force of Stryker, we know how to sell and we're able to really do that very, very well. I would tell you in the adjacency space, no change to the adjacencies that we're interested in.

I think I've mentioned them before. I would tell you is neuromodulations when I've talked about in the past. And within neuromodulation, obviously there's a lot of different parts to that, there's spinal cord stimulation, there's deep brain stimulation, there is peripheral nerve stimulation and there's even stimulation that's as you know in sleep apnea and I do believe electrical treatments is going to be a big part of the future. We -- over time, we've been low hot, cold on spinal cord stimulation. I would tell you right now, we're probably a little bit more cold on it just kind of a challenging market. And so that's really the only thing, maybe I haven't said in the past, but otherwise every other adjacency, I've talked about -- that I talked about in Q1 are still very much on our radar screen. And as our cash frees up, probably more into next year, if the tuck-ins aren't at a significant size and we have cash starting to buildup on our debt position better, hopefully, we'll be able to make a move in one of those adjacencies that I've talked about in the past.

[Richard Newitter, Analyst at Truist Securities]

Thanks. And then maybe just a follow-up on spine, it's one of the few businesses that is not back in the high-single digits or better yet, but you obviously have a pretty good line of sight to seemingly transformative technologies and product rollouts with Mako but that's a year, year and a half away. So I guess, do we just kind of think of spine as a grind from here higher or a stabilization and then look out when '25 comes around?

[Kevin Lobo, Chair and Chief Executive Officer at Stryker]

I think the word stabilization, I'd probably prefer that's been grind, but yes it's probably both, right. So spine is a tough market, no question about it. But already with Q Guidance we're feeling good about that. We've bolstered our expandible portfolio a bit. We still have a couple of gaps that we're looking at obviously we'd like to flip back to fill. But the enabling tech is really what gets us excited. So I think the robotic platform will put us on a par at least with the competitors. And then this other secret launch I talked to you about from coming out of Instruments, which we've shown some surgeons kind of will put us ahead of the game on enabling technology. But yes, we have to wait. Unfortunately, it's not ready yet, it's coming, the instrument launch will probably come in before the Mako and that'll be able to be used with the Q Guidance, that'll be compatible with Q. So that's where -- you'll hear about that probably earlier than you'll hear about Mako. But yeah I wouldn't assume we're going to try to kind of keep in line with market growth, which is kind of what we're doing right now. Hold our own, until we get to that period of time and then we could start to grow more like a typical business with Stryker.

[Operator]

Thank you. At this time, I would like to turn the call back over to Kevin Lobo for closing remarks.

[Kevin Lobo, Chair and Chief Executive Officer at Stryker]

Thank you all for joining our call. We look forward to sharing our Q3 results with you in early November.

[Operator]

[Operator Closing Remarks]