Stryker Q1 2024 Earnings Call Transcript

Yeah. Thanks, Robbie. Yeah, we're really pleased with the performance in the first quarter and really nothing has changed. So, the good level of volumes that we're seeing in procedures that we saw through 2024 has continued into 2025, and our capital order book remains very strong. So, capital equipment, whether it's large capital or small capital, remains very robust. We have a nice healthy backlog and that gives us the confidence to raise our organic sales growth guide for the full year.

Yeah. Thanks, Robbie. Not a major change. I would say, the Interventional Spine business had a terrific quarter that was really high growth. Our enabling technologies within Spine, the Q Guidance System, has really picked up good momentum as well. The Mako Spine and the CoPilot won't be launched till the fourth quarter. So, that's not really having much of an impact. And I wouldn't say that the competitive disruption or the competitive merger is really having much of an impact yet. It's still very early days, so nothing too remarkable. But overall, a good number and a good, solid number for our Spine business.

Yeah, sure. Thanks, Larry. I think if you look at what happened in OI&E and also what happened with our tax rate, obviously, we had some favorability just for this quarter. I think fundamentally, we're still targeting $250 million roughly in OI&E and a tax rate that really is still between 14% and 15%. So, we're still holding to the below the margin line guidance that we had built into our initial guidance that we provided back in January. I think honestly, if you look at the raise in terms of how we think about it, the robustness of the top line, obviously the earnings that we're able to kick off of that, and then lastly, we're just we're feeling that we're seeing good momentum and positivity around the programs that we've put in place to drive leverage to get back to that 2019 number. And so, all of that really combines to really give us the confidence to give us that $0.10 raise from the midpoint in EPS.

Yeah, thanks. I'm a little bit mystified by this concern, to be honest with you. If you attended the SAGE's meeting, you could clearly see that we have a very differentiated solution that will frankly enable -- they can grow at whatever rates they're growing with their new product, and we're going to continue to have a very strong performance in endoscopy both this year and for years to come. The overlap in our businesses is minor. We are multispecialty. We play in most of our procedures, frankly, aren't being done robotically today. We also are the clear leader in fluorescence imaging. Just most recently, we had the American Association of Thoracic Surgery where we partnered with CYTALUX, this new fluorophore, to be able to light up a lung cancer for lobectomy procedures, which we're the only company that can do that, that can light up that fluorophore. So, surgeons are going to demand this for safer surgery, but that doesn't mean that Intuitive can't grow with their robot. We are really playing in spaces with very little overlap, and both of us can continue to have very strong performance for many years to come. So, to me, this concern is frankly mystifying and not at all, for me, a concern for our endoscopy division.

Yeah. Hey, great. So, certainly if you look at our fourth quarter last year, I wouldn't think that those are easy comps. We had a pretty monstrous fourth quarter last year. And so, comps is probably the biggest concern that we have. And we do pick up an extra selling day in Q3, an extra selling day in Q4. It's only one quarter, right? There's a lot of uncertainties out there in the marketplace. We feel very good about our business, and I think this is an appropriate raise at this time. Let's see how things go at the end of the second quarter, and we can update you further on the outlook for the year.

Yeah. Certainly, when I talk about those five areas, those are adjacencies. So, we have our core, basically supplementing our existing businesses with new technology. That's always going to be the majority of the deals we do. Then beyond that, as we think about adjacencies, those are what I'm calling my top five priority adjacencies. And what I'll tell you right now is we have an incredibly healthy pipeline of deals. Now, of course, pipeline doesn't always get realized, right? There's always a washout rate as you go through these processes. But I'm feeling really excited about the pipeline. They are mostly in the tuck-in variety. And so, they're just like the one I mentioned for our communications business or our hip business. You're going to see most of those occur, at least for the next couple of quarters. Beyond that, if we do decide to branch out, those other areas I talked about are still of high interest. Nothing's really changed on that front.

Yeah, sure. I can start on the instruments, and I'll have Jason talk about the Other Ortho. And you're right, these are bright shining stars. The Instruments Division had a fantastic quarter, and it was really across both Surgical Technologies as well as Orthopedic Instruments, really across the board. If you look at smoke evacuation, we've just continued to have tremendous momentum. Obviously, the market has been growing very robustly, but we have a terrific commercial execution, growing almost 50%, which is really awesome. And that was great growth in the U.S. and also really great growth internationally. And we see that continuing, maybe not at 50%, but we see that very high double-digit growth through the rest of this year and into next year, especially as more states decide to mandate smoke evacuation. So, that was really a big push.

We also have the SurgiCount Plus. We've launched a new product that combines the Gauss surgical, quantification of blood loss, as well as the sponge counting. So, it's all combined into one solution, which is really elegant and really being well received by our customers. So those are probably the two biggest catalysts within Surgical Technologies. Neptune waste management continues to roll, but that's not new information. And then if you flip over to orthopedic instruments, we have the Steri-Shield doing extremely well. Our Power Tools, obviously, you know about the new launch. That's still, let's call it, just little about 1.5 year in. That's continuing to do very well, as well as Pulse Lavage and all the other products, and just really great commercial execution by the Instruments team. It's really been a flagship division of Stryker. If you go back the last 10-plus years, it delivers very, very consistently, and it did so again in the first quarter.

Yeah, Joanne, it's Jason. I'll take the Other Ortho here. So, just a couple additional comments, I guess, to my prepared remarks would be, like I said, we had a record quarter of installations in the first quarter this year. If you remember, we had a record quarter in the fourth quarter of last year. So, the momentum is going really well on the Mako front. I commented on the direct-to-patient campaign. We've seen really good results out of that, so we feel good about it, and we like what this will translate in terms of the hips and knees business as we move forward as well.

Yeah. So, certainly, Europe continues to be a growth engine for Stryker. I would tell you in the first quarter it was a little bit softer than it has been, and that was really because we had a big quarter last year. It's really more comp related. I do expect Europe is going to continue to pick up in Q2, Q3, Q4. So, the overall run rates are really healthy in Europe, and the U.K. was a bit of a standout in the first quarter, but the other regions are all going to be fine. We had really big, big sales in Germany and in Southern Europe last year in the first quarter. So, to me, it's just a comp issue. I'm not at all concerned about our international. We're going to have another strong year international. So, you talked about Europe. What else did he say? [Indecipherable].

Yeah, Pito, I guess what I would say here, as we look at the overall capital environment, and you can see in our results in the first quarter in our capital business is very strong. So, we see opportunities here across the board. I think we mentioned that our backlog continues to be elevated here, so we expect strong capital as we go throughout the year.

Yeah. Thanks for the question. What I would tell you is we're in this constant rhythm of innovation, and we just had a number of products collide at the same time, but they're constantly being refreshed. So, I wouldn't think about this as a fleeting moment. If you think about 9.7% in '22, 11.5% in '23, another potentially double-digit we'll see. We're not guiding to that just yet, but we have a chance certainly to get to another double-digit growth this year. And next year you're going to have the impact -- we're just launching LIFEPAK 35. It's not going to have as much of an impact this year as next year. Pangea, not as much impact this year as next year. The Mako applications have really no impact this year. It's really more next year. And then we'll just keep rolling other innovations on top of that.

So, I would just think, assuming the market conditions stay similar, we're in a rhythm where this high growth is what you should come to expect from us with no end in sight. As long as we continue to invest as we are, roughly 7% of our growing top line in new product innovation, and we continue to be active with acquisitions because, as you know, we acquire high-growth assets. And then after the first year, that rolls into organic growth. We had a bit of a pause last year. We're going to refill that tank this year, and that'll contribute to organic growth in the years ahead. So, I would not look at this as some kind of, we reached a peak, and we're starting to come down on the other side. Absent some market adjustment, we're in a new normal, at least for a while.

Hey, Shagun, it's Jason. I'll go back to my prepared remarks, as we think about Mako Spine and CoPilot, we're looking at a Q4 launch there. And for Mako Shoulder, it'll be the end of this year from a launch standpoint.

Look, I'd just call it a stable market. It really hasn't changed much if you think about waiting lists, if you think about staffing, it's continually gotten better over the course of '23. So, I would just say it's very stable in terms of the overall market. I don't see shortening at all. I don't see it elongating. It's just, as we saw all through '23, it's a continuation into '24 of that kind of stable marketplace. And the new defibrillator just got approved, so that's not really been a big contributor to our backlog. Our backlog is just the healthy order book of all of our existing products across Medical, across even some of the Instruments businesses and Endoscopy. So, there wasn't any new spike. But we've had a healthy backlog going into '23, we have it going into '24, we continue to get good orders, so yes, we're shipping out at a nice rate, but the orders are still coming in at a very healthy rate. So, we're really not burning through any meaningful backlog. And that gives us confidence for, at least, through the rest of this year. And if orders continue, and obviously could potentially spike with some of these new products, that's only going to give us more tailwind for growth.

Sure. Yeah. I think in Q1 what you saw was just timing between working capital in Q4 and Q1, and then just seasonally in Q1, we have higher cash outflows that occur, so that's the impact of that. On an overall basis, there's no change to the targets that we discussed back at the analyst meeting in November. And that would be the 70% to 80% free cash flow conversion number.

Hey, Travis, it's Jason. For competitive reasons, we won't necessarily disclose a number in terms of the amount going into a competitive account, but I will say that number is big for us and continues to be a winner for us in terms of going into competitive accounts.

Yeah, Travis, it's Jason. I'd say a couple of different things here. The smoke evac business has continued to be high teens, 20% grower. In smoke-free states, it's higher than that and similar to what we said today in the prepared remarks. So, it's been a great tailwind for us, and we think it will be into the future.

Yeah. We've also had our supply chain has really improved in terms of being able to meet the tremendous demand that we've had, and that was also a contributor. So, we've had tremendous growth, tremendous demand, and our supply chain has really kicked in a strong way. And that puts us in a good position, not only to deliver in the first quarter, but also to deliver in the quarters ahead.

Hey, Matt, it's Jason. Keep in mind, from a regulatory standpoint, there's timelines as it relates to the FDA that can shift things by a week, sometimes a couple months. We've always been targeting a back-half launch year, so I wouldn't consider this a significant change in the timeline. As you think about the guidance that we have for this year, there was certainly nothing assumed in terms of our guide relative to the Spine or Shoulder launch. So, no impact there as we think about that.

Yeah. Look, I don't think I said that. I'll have to double-check the transcript, but I didn't give a precise number of double-digit growth for all that time. What I did say is we are in this high-growth environment based on our innovation cycle, and we're going to continue to have these new products fuel growth. It does depend on the market, right? So if the market stays at this level, could we stay in that double-digit range? Sure, we could, but there's no guarantee that the market will stay this elevated both in terms of procedures as well as the healthy capital environment. So, it does depend on the market. And obviously we outperform the market, and depending on the year, it's 300 basis points or whatever that number is. But we're not going to defy gravity. If the market falls down to a certain level, then obviously our growth would be similarly impacted. So, I don't believe I was that precise with double-digit over five years. But I do feel bullish about the ability for us to continue to be a very high growth business.

Yeah, sure. Thanks. Jason every quarter we'll talk to you about new products, and he highlighted a couple this quarter with the LIFEPAK 35 and Pangea in our Trauma business, both of which are really super exciting products that are going to contribute to growth for at least a few years to come. As it relates to Mako, so the new spine robot will be two parts: one part is the actual robot with a different attachment that will enable the pedicle screw guidance; the second part is the Q Guidance tray that's already being sold today. So, that is used for spine procedures. It's a lightning-fast camera. You saw it at NASS. It's being sold today to do navigated spine procedures. So, those two components will make up the Mako Spine system. And then in addition to that, the CoPilot product will be able to do vasectomies and bone preparation with haptic feedback to be able to protect you from getting close to vital structure, spinal cord, etc. And that, again, is going to be compatible with the Q camera and the same screen. So, it's a comprehensive ecosystem that'll be launched, and we're already seeding the market with one half of the system with the Q Guidance, and then the second half is really whether you do Mako for pedicle screw placement or using Q Guidance to do the bone preparation. So, those are the three pieces of our enabling technology solution, part of which we're already selling today. So, every time we're selling Q, which is contributing to our Spine growth, it's part of the solution that'll then be able to be used both with CoPilot as well as with Mako. So, hopefully that clarifies things for you.

Okay. Yeah. Hey, first, just so we're clear, the target is 200 basis points over the next two years, '24 and '25. And that's what we presented back at Analyst Day back in November. It's also the guidance we brought out in January. I think if you do the rough math, just based on our guidance, you'll see that we're in the realm of 100 basis points or 100 basis points plus in this first year. And you're correct, 80 basis points is a great start to the year. Seasonally, as we think about how this plays out for this year, we expect second half margin expansion to be stronger than first half just given the seasonality of earnings that we see as the year plays out.

No change in our overall approach. If you think about what we did in 2023, you saw margin expansion coming through gross margin. 2024 we think, and we expect that we'll see op expenses will lead more of the margin expansion, and then our goal is in 2025 we'll likely be more balanced between gross margin and operating expansion expenses. There are lots of programs we have in place. You've seen the results that we've had in price. We also have low-cost greenfield sites, strategic insourcing. We'll continue to push shared services efficiencies, IT harmonization, and then honestly, if you just look at the natural leverage that we drive when we're growing at the high levels, that also is a piece of this equation. So, we're excited about the Q1 performance. We will still continue to be working on it through the remainder of this year and into next year, and we'll update you quarterly as the earnings calls play forward.

Yeah. Well, I'd say if you look at our Trauma business, core Trauma, so excluding upper extremities and lower extremities, if you look at core Trauma, we've been historically the leading nailing company in the marketplace, but we haven't been the leading plating company. Now we have some terrific plates, whether it's our clavicle plates, our pelvic products, but we didn't have a comprehensive system of variable-angle plating. This is an amazing product launch, very comprehensive, and will really be a shot in the arm for plating, which, by the way, is more than half of the procedures in Trauma are plating versus nailing. And so, we are wildly excited about this launch. We already have an incredibly high-performing core Trauma business, fabulous leadership in our core Trauma, and now we have a fabulous, comprehensive plating solution. We've done roughly 40 cases so far. Feedback has been excellent from the surgeons. It'll take us time. We have to build out the sets, and these launches take time to fully roll out. But you're going to start to see the impact as early as Q3. We're going to have some procedures obviously done in Q2. It won't be too big an impact, but it'll start to have more of an impact Q3, Q4, and beyond.

As it relates to LIFEPAK, we are bringing in our sales force for a full launch preparation in May, and we'll start to have our first shipments sometime in June. So, there won't be much of an impact at all in Q2, but certainly going into Q3, Q4, we did show the product at a recent fire display conference, fire houses, and the feedback was overwhelmingly positive. People were seven and eight rows deep looking at the product. It is really getting fantastic feedback. And so, we're building the product right now and getting ready for a launch. And these kind of launches, because of the price point, you're not going to see probably as big an impact this year as you would see -- you'll see some, obviously. Medical is already performing incredibly well, but you'll see some impact this year, but you're going to see a lot more in the next two to three years after that. These are long-cycle products. They last a long time. And we know how to replace capital equipment at Stryker, and we're going to be doing that. It's incredibly exciting. The last big defibrillator that we launched was almost 20 years ago. So, there is a huge replacement market for this modern and really fully featured product.

Thank you.

Hey, Caitlin, it's Jason. As we think about upper extremities, this continues to be a fast grower for us. As we think about transition and the opportunity in the ASC, no change from that perspective. And we expect this will continue to be a fast-growing business for us.

Yeah. And as it relates to product launches, I think we talked about this on the last call, but we have about five products that are either going into full launch that were in partial launch or are being launched. We have a Perform Fracture System which is really exciting, a reverse stemless product. We have the Pyrocarbon, which is a hemiarthroplasty product. We have the HoloLens, which is you can visualize the surgery in the operating room. That was a limited launch last year. That's going to move to full launch. And I think -- what's the fifth one, Jason?

Those were the big ones.

Those are the main four ones, but there's a fifth one. I can't remember right now, but if you go back to last call, I think we did highlight all of those products. So this is a business that's been growing roughly 20% every single quarter. That continued. We had a very strong first quarter, and we expect that to continue. Not seeing any real change in the market dynamics at all where we have tremendous momentum, and we expect that momentum to continue.

Yeah. Well, firstly, if you look at our business in Europe, it gives us tremendous market share in France and the dual mobility, they were the originators of dual mobility, and they have a terrific portfolio of products, not just for France, but certainly they're well known throughout Europe. And then eventually even some of those products will be looking to bring those to the United States. So, it really gives us a shot in the arm in Europe, where, as you know, we've historically had lower market shares than other parts of the world. So, we're very excited about this product. The feedback so far from surgeons has been excellent. They're very differentiated products that have a lot of history behind them and are really well received in the marketplace.

Hey, Sam, it's Jason. I'll take this one. And Glenn can pile on anything additional here. But again, to Glenn's comments, as you think about the margin expansion, getting to 100 bps on a full-year basis, being second half weighted, it certainly would imply that you could have a quarter less than that from a margin expansion standpoint. Certainly, margin expansion in every quarter, but I wouldn't necessarily say it'd be to the levels of what you saw in Q1 every quarter.

Sure. If you think about pricing, we do sort of -- they are a tale of two cities. On the MedSurg side, we generally are able to gain pricing. There's certainly a premium placed on technology, and we work through contracts that provide bands of pricing that allow us to approach customers. On the Ortho side, you're right. Traditionally, it's been a market that has had price declines. I would say that as we think about our Ortho business, five years ago or even six years ago, we were looking at price declines that were in the 3% to 5% range. And I would say now what we're feeling, and based on the contract discipline that we have put in place with customers, as well as maybe a little bit of the impact of Mako being a closed system, we're feeling that we see less negative price performance on the Ortho side of our business, but we don't necessarily anticipate that Ortho will ever get to positive, but we are feeling confident about less negative.

Hey, Josh, it's Jason. I'll take this one. I'd say a couple different things here. As we think about the market, our view has really not changed at all here. Even if you go back to Investor Day, November last year, we said the ortho markets would grow, call that mid-single digit area, and we would outperform that 200 bps to 300 bps above that. So, as we think about the full year this year, that's how we're looking at the markets, and we feel as good as ever about that.

Okay, great. Thanks. So, firstly on international, what we're seeing is the same dynamic we saw in the U.S. about five or six years ago. We are installing a large number of robots, and those tend to be leading indicators. And as you install those, then they start to do the procedures, and you see growth in the implants. So, they're where we were five, six years ago. It's really picking up in India, Japan for sure, even parts of Europe are picking up. We already had strength in the U.K., but we're picking up in other parts of Europe. China is still a bit small but starting to pick up as well. Korea is on fire for us with Mako. We're still a bit sluggish in Latin America. I'd say that's still a big opportunity for us. And there are hospitals that are demanding it, and we've made some changes in our own structure to really be able to address that opportunity. But overall, it's target rich. It's later in the market cycle than it has been in the U.S. and in Australia, even Canada is starting to really pick up. And that's a very new dynamic. They were very, very late to the Mako story. And so, we're very excited, not just with the number of installations, you've seen multiple quarters of international really humming on installations. But that is a gift that will keep on giving. We've seen this in every market where you have large installations, it is a precursor for significant high growth quarter after quarter. So, very excited about the international opportunity. And it's still early days in many of these markets. So, so far, so good. We're excited. And the reception, frankly, the most important thing is utilization. And so, as we make sure these robots are being installed, are they being used at a high rate? And frankly, today, the country with the highest utilization per robot is India, highest in the world. But it's picking up in other markets as well.

The second part of your question was on Gauss. So, yeah, we're really excited about Gauss. Obviously, this was an AI solution that we acquired to quantify hemoglobin for delivery as well as other general surgery procedures, and it had a different interface for the healthcare worker. We've improved that interface to make it a lot easier to use and combine that with our SurgiCount product, so the sponge counting. This is also measuring the blood in the sponge and the canister, but also counting the sponges to make sure no sponges are left in the body. There's ideas that we have about how we can connect to this tablet and have other devices tied to the tablet. It's a common tablet being used for both solutions. Not ready yet to talk about what that will be. There's a lot of other connectivity discussions going on inside Stryker, particularly with Vocera. That Vocera, obviously, we have the bed now connected to the Vocera beds [Phonetic] in that system, and there are a lot of other discussions about what else can we connect with Vocera. It's just a little premature for us to talk to you about what those are. I think I'd rather have those products ready for launch and then talk about it. But clearly, we are looking at the workflow and bringing better IT solutions for our customers. Really looking at that across the portfolio, how can we improve workflow in the hospitals, how can we reduce errors for hospital-acquired conditions. Safety and outcomes is a big focus of many of our MedSurg divisions, and I think we're on a really good track. Did I ever think we'd buy an app on an iPhone, which is really what Gauss is? No, but that's the future, and that's going to be our focus. And Vocera, obviously, was a bigger foray into the digital solution world. But don't expect that this will be the end. And I can see within our deal pipeline, HIT is going to feature. And don't be surprised if we continue to do both organic innovation as well as acquisitions to bolster our presence within HIT.

Thank you for joining our call. As you can see, 2024 is shaping up to be another strong year for Stryker. We look forward to sharing our Q2 results with you in July. Thank you.