史賽克 (SYK) 2018 Q2 法說會逐字稿

Welcome to the Second Quarter 2018 Stryker Earnings Call. My name is Gigi, and I will be your operator for today's call. (Operator Instructions) This conference call is being recorded for replay purposes.

Before we begin, I would like to remind you that the discussions during this conference call will include forward-looking statements. Factors that could cause actual results to differ materially are discussed in the company's most recent filings with the SEC. Also, the discussions will include certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release that is an exhibit to Stryker's current report on Form 8-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 Second Quarter Earnings Call. Joining me today are Glenn Boehnlein, Stryker's CFO; and Katherine Owen, VP of Strategy and Investor Relations. For today's call, I will provide opening comments, followed by Katherine with an update on MAKO. Glenn will then provide additional details regarding our quarterly results before we open the call to Q&A.

Our momentum continued in the second quarter with organic sales growth of roughly 8%, which included one extra selling day. Our results were well balanced across businesses and geographies, reflecting the strength of our diversified model.

Neurotechnology and Spine led the way with global organic sales growth of 12%, driven by excellent Neurotechnology growth of 16%. We were also encouraged by Spine organic growth of over 5% despite the challenging market backdrop.

MedSurg grew 7% organically with strong Instruments performance behind its latest-generation power tool, while Endoscopy growth slowed owing to tough year-over-year comparisons.

Orthopaedics organic growth of 7% was once again led by knees and Trauma and Extremities. MAKO momentum continues with over 550 robots installed globally, and with high demand, we are confident regarding the outlook for continued strong robot sales.

Internationally, emerging markets grew double digits, and we had strong performances in Canada, Europe and Japan.

Our focus on cost transformation for growth, CTG, initiatives remain a key priority and is driving meaningful improvement in our operating margin, which increased roughly 50 basis points in the quarter despite acquisition-related dilution.

We continue to make meaningful investments in our product portfolio across the businesses, with R&D coming in at 6.5% of sales. These investments, coupled with expanding our sales and marketing teams, are a key factor behind our top line growth, which remains at the high end of med tech.

With the strong organic sales growth and operating margin expansion, we delivered adjusted per-share earnings of $1.76, topping our targeted range of $1.70 to $1.75 for the quarter. Given our solid first half performance and the outlook for the remainder of the year, we now look for organic sales growth of 7% to 7.5% and adjusted per share earnings of $7.22 to $7.27 a share despite a less positive outlook on foreign currency.

Before I turn the call over to Katherine, I'd like to take a moment to thank David Floyd on his planned retirement from Stryker. David has had a long and successful career in Orthopaedics and has been a tremendous contributor to Stryker's success since joining us nearly 6 years ago. With the pending retirements of both David and Lonny Carpenter, we have adopted a new operating model and appointed Tim Scannell to President and Chief Operating Officer. We have also appointed Andy Pierce and Spencer Stiles to group president roles and named new presidents for Instruments and Endoscopy, Dylan Crotty and Brent Ladd.

As you know, we have many initiatives underway through our CTG program. With Tim as COO, we expect to drive greater efficiencies and speed of execution. Our new commercial structure will encourage greater collaboration and promote globalization across the company. We will remain highly decentralized with sales, marketing, R&D and business development, which is our proven offense. It's a credit to our focus on talent development to have so many leaders ready to take on greater responsibilities. For me personally, I'm committed to remaining as CEO of Stryker for many years to come. I believe this structure will allow us to drive exceptional results and continue to drive high growth despite becoming a progressively larger company.

As you've seen over the past 5 years, we have consistently outpaced the market and have accelerated sales growth meaningfully. And we plan to continue this momentum through the remainder of this year and beyond.

With that, I will now turn the call over to Katherine.

Thanks, Kevin. My comments today will focus on MAKO with updates on the key metrics we shared in Q1. In the second quarter, we installed a total of 39 robots globally with 29 in the U.S. compared to a total of 26 in the year ago quarter, of which 20 were in the U.S.

Upgrades of robots in the field to the Total Knee application continued, and we remain on track to have the majority of robots upgraded by Q3. Over 40% of the robots sold in Q2 were in competitive accounts, where Stryker either had no new market share or share well below our average level.

During the quarter, roughly 160 surgeons were trained on the Total Knee, bringing the total number of surgeons trained since launch to approximately 1,200.

Looking at U.S. procedures. In Q2, MAKO Total Knee procedures approximated 10,100, bringing the year-to-date total to over 18,000. With all MAKO procedures topping 17,500 in the quarter, Total Knee represented the majority at over 55%.

Utilization rates also continued to increase, up roughly 55% year-over-year.

Overall, we are pleased with the continued adoption of the MAKO robot, and it's clearly enabling us to drive meaningful knee market share. We are also collecting clinical data that evaluates a myriad of outcomes with the MAKO Total Knee and expect data at the upcoming major orthopaedic meetings later this year and more significantly in 2019.

With that, I will now turn the call over to Glenn.

Thanks, Katherine. Today I will focus my comments on our second quarter financial results and the related drivers. We have provided our detailed financial results in today's press release.

Our organic sales growth was 7.9% in the quarter. As a reminder, this quarter included one more selling day, which had an approximately 1% positive impact on growth. As we have said before, selling days generally do not have an impact on the performance of our capital businesses. Additionally, it is anticipated that selling days will have no meaningful impact on future quarters or full year growth.

Pricing in the quarter was unfavorable 1.1% from the prior year, while foreign currency had a favorable 1.1% impact on sales. U.S. organic sales growth was 7%, and international organic sales growth was 10.2%. Both geographies benefited from one additional selling day. In the U.S., there were strong performances across Orthopaedics, MedSurg & Neurotechnology. International sales growth demonstrated solid gains in Europe, emerging markets, Canada and Japan.

Our adjusted quarterly EPS of $1.76 increased 15% from the prior year, reflecting strong drop-through on sales growth, combined with good operating expense control. Our second quarter EPS was favorably impacted by approximately $0.03 from foreign currency exchange rates, including translational and transactional impacts, which was consistent with our expectation at the start of the quarter.

Now I will provide some highlights around our segment performance. Orthopaedics delivered constant currency and organic growth of 6.6%, including organic growth of 5.8% in the U.S. This performance was highlighted by strong performances in Knees of 8.2% and Trauma and Extremities of 6.8%.

Some of the key drivers of performance in the quarter included strong demand for our MAKO TKA knee platform, our 3D-printed products and our Foot & Ankle portfolio.

Internationally, Orthopaedics delivered organic growth of 8.3%, which reflects solid performances in Europe, emerging markets, Canada and Australia.

MedSurg continued to have strong growth across all its businesses in the quarter with constant currency growth of 9.2% and organic gains of 7.3%, which included a 6.8% increase in the U.S.

Instruments had U.S. organic sales growth of 14%. This growth reflects the strength of its System 8 and Micro Power product lines, offset somewhat by supply issues in Puerto Rico. Moving forward, we anticipate no material impact related to Puerto Rico supply issues.

Endoscopy delivered U.S. organic sales growth of 3.8%. This reflects strong demands for its booms and lights and sports medicine products, while our 1588 camera is facing tough year-over-year comps as well as being longer in its life cycle. Endoscopy continues to execute on the integration of its NOVADAQ acquisition, and it's on plan.

The Medical division had U.S. organic growth of 5.3%, reflecting solid performance in its bed, structure, power cot and physio products.

As expected, Medical Sage business continued to drive its recovery and is on track to deliver strong growth for the remainder of the year, albeit against softer comps.

Internationally, MedSurg had organic sales growth of 9%, which reflects strong sales in Canada, emerging markets, Europe and Japan.

Neurotechnology and Spine had constant currency growth of 18.5%, which includes the full quarter impact of our Entellus acquisition and organic growth of 12.4%. This growth reflects the continued strong demand for our Neurotech products, offset by slower growth in our core Spine business.

Our U.S. Neurotech business posted organic growth of 15.4% for the quarter, highlighted by continued strong demand for our hemorrhagic, ischemic stroke, CMF and our Neuro Powered Instruments products.

Our Spine business continued to see market softness and mid-single-digit pricing declines. Offsetting this, our IVS business and our Tritanium implant products continued their double-digit growth trends.

Internationally, Neurotechnology and Spine had organic growth of 16.3%. This performance was driven by continued strong demand across most geographies for our Neurotech products.

Now, we'll focus on operating highlights in the second quarter. As noted in the press release and discussed in our Q1 call, the adoption of ASC 606 primarily had the impact of reclassifying certain expenses from SG&A to sales. As such, all references to basis points improvements are net of this impact.

Our adjusted gross margin of 66.1% was up 10 basis points from the prior year quarter. Compared to the prior year quarter, gross margin expansion was favorably impacted by productivity and efficiency, offset by price, foreign exchange and business mix. R&D spending was 6.5% of sales, which was 10% -- basis points higher than the prior year quarter.

Our adjusted SG&A was 33.9% of sales, which was 50 basis points favorable to the prior year quarter. This improvement reflects the continued focus on operating expense improvements through our cost transformation for growth, or CTG, program, including key projects focused on indirect purchasing and shared services. This is offset by the negative impact of our acquisitions and continued planned investments in our CTG program efforts, like our ERP project and certain investments in our Mako TKA platform.

In summary, our adjusted operating margin was 25.7% of sales, which was approximately 50 basis points favorable to the prior year quarter. Our operating margin reflects good leverage and continued operational savings, offset by key investments and acquisitions, the latter of which had an approximately 30 basis points negative impact in the quarter.

We remain confident in our ability to deliver on our full year commitment of driving a minimum of 30 to 50 basis point improvement in our operating margin.

Next, I will provide some highlights on other income and expense. Other expenses decreased from prior year quarter, primarily due to favorable interest income.

Our second quarter adjusted effective tax rate of 16.8% reflects an underlying operating tax rate of 17.5%, primarily offset by the benefit related to stock compensation expenses.

Focusing on the balance sheet. We continue to maintain a strong position with $1.9 billion of cash and marketable securities, of which approximately 76% was held outside the U.S. Total debt on the balance sheet was unchanged from year-end at $7.2 billion.

Turning to cash flow. Our year-to-date cash from operations was approximately $946 million. This reflects increased earnings, which are somewhat offset by increases in working capital, including higher tax payments as a result of tax reform and specifically required payments related to the toll tax on previously untaxed foreign profits.

And now I will discuss our third quarter guidance. Based on our performance to date and anticipated strength in the remainder of the year, we now expect organic annual sales growth will be in the range of 7% to 7.5% for 2018. As a reminder, Q3, Q4 and the full year have the same number of selling days.

Given our year-to-date performance and continued momentum, we now expect that our adjusted net earnings per diluted share will be in the range of $7.22 to $7.27 for the full year.

For the third quarter, we anticipate adjusted net earnings per diluted share to be in the range of $1.65 to $1.70.

This guidance, full year and quarter, includes the anticipated impacts from the aforementioned business investments and the previously announced $0.04 dilution related to Entellus. Additionally, it includes a reduction of foreign currency translation and transaction favorability from our previous full year guidance of $0.08 favorability to approximately $0.05 favorability.

And now I will open up the call for Q&A.

(Operator Instructions) Your first call comes from the line of David Lewis from Morgan Stanley.

Kevin and Glenn, just a couple of questions on kind of back half of the year guidance. So maybe I'll start with revenue first. So guidance, to us, sort of implies stability into the back half of the year kind of around 7% organic. Comps are kind of stable first to second half. But maybe, Kevin, can you just kind of talk about your underlying momentum and the Orthopaedic business, and USDs was actually better by our math. But just talk about some of the drivers into the back half of the year that kind of give you the confidence that this momentum continues. And then I had maybe a follow-up for Glenn.

Sure, David. As you've seen, we've had a very stable growth platform now for well over a year. And what I mean by stable is, across businesses and across geographies, we're really performing very well. From quarter-to-quarter, you see some variability between one division and another division, but it's really the balance across our portfolio that gives us the conviction that we can continue to sustain north of 7% organic growth. And that's why we moved our organic growth up. Now we moved it up at the end of the first quarter. We've moved it up again at the end of the second quarter, of course, based on year-to-date performance but as well as the outlook. And really, I don't want to single out any one business. It's really broad-based strength across our portfolio.

Okay. I think, Glenn, kind of similar question, just on the leverage into the back half of the year. I mean, you've done 50 basis points underlying kind of first 2 quarters, and that's probably better than -- that's the top end of your range. Where do we stand in sort of the 30 to 50 basis points? As I think about the back half of the year, Sage, physio, just the normal cycle of your business, which indicates more leverage in the fourth quarter. Just seems like to me the second half of the year can be a stronger leverage half than the first half of the year. So why shouldn't we be thinking about sort of the upper end of 30 to 50 or better than 50 as we progress through the back half of the year?

Yes, David. I think as you think about the guidance, the 30 to 50 basis points, and the fact that, in Q1, we said it was a minimum, I mean, this is really a long-term financial goal. It's also an enterprise goal. So after Q1, we revised that range to be firmly a minimum of 30 to 50, which, I think, for us, captures the potential upside that might exist in the rest of the year.

Your next call comes from the line of Bob Hopkins from Bank of America.

Kevin, I wanted to ask you a question about capital allocation because there's a lot that's happened during the quarter that's caused investors to be very interested in your thoughts on capital allocation. Obviously, you've made some leadership changes. There's been some, obviously, talk in the press. There's been small cap company valuations moving all over the place. So I guess, the way I'd phrase the question is, kind of where is M&A right now on your priority list for capital? Do the management changes that you've talked about over the last couple of weeks make M&A less or more likely? And maybe I think it'd be sort of important to kind of hear your -- the kinds of deals that you might consider. Just remind us on kind of your top priority there.

Bob, let me start by saying that our capital allocation philosophy has not changed, and it's been consistent for the entire time I've been the CEO. Our first priority is M&A. Our second is dividends, which grow roughly in line with earnings. And third is share buybacks. So there's been absolutely no change in that. As it relates to the management changes, we've become a much bigger company. And as you become bigger, you look for opportunities to refine the organization. We had 2 retirements, one, Lonny Carpenter, a long-standing executive; and then David Floyd, who had spent 6 years as the Head of Orthopaedics. So this gave me the opportunity to revisit our structure and really to provide greater growth potential for a lot of our leaders as we become larger. The CEO and COO model works very well. We did a lot of benchmarking, and I spoke to many other CEOs of other companies about how that model works. And in Tim Scannell, I think, I have an outstanding COO that really knows the Stryker culture and will be a terrific partner for me. But it also gives a lot of opportunities to other leaders who have really demonstrated great performance over time. So I wouldn't read anything more into that at this stage of our development as a company. And in my tenure as the CEO, this is sort of a nice, logical move really based -- triggered by the retirements.

Yes. And Bob, just to address the latter part of your question. There's no change either in terms of how we're thinking about M&A. As you look back historically, the vast majority of our deals tend to be small to midsize. We have a decentralized BD model that we're not going to change, that has dedicated BD folks in the division. It's that closeness to the customer, we think, helps us identify those targets. And so that's a proven offense. It's helped accelerate our organic sales growth, and that's the offense we're going to continue with.

Your next call comes from the line of Rick Wise from Stifel.

Let me start off with Mako. Every quarter, Kevin, you and Katherine highlight that Mako system's shifts were to accounts where Stryker has, today, subpar -- or has had little or no Stryker market share. Maybe approaching it from a different angle, what's going on at these accounts in subsequent quarters? Is Mako rapidly tipping the scales where you're now closer to your average knee share in these accounts? Does it take more time than that? How do we think, essentially, about the share capture progress post-Mako versus the existing Stryker customers adopting? Where are we in all that?

Yes, thanks, Rick. Maybe I'll just grab that one. What we do see is once we get into these accounts where we haven't had any business or we're fighting well below our weight, it gives us the opportunity to then go and sell the full portfolio of products, whether it's our 3D-printed cementless implants or our broader reconstructive offering. And what we see in accounts where we have a robot in the U.S., that Total Knee revenue in those accounts is growing about 5x faster than the corresponding account that doesn't have a robot, which makes sense because we now have an in to accounts where weren't really selling a meaningful amount. And so that's the biggest benefit as we continue to grow that base. It's -- in the U.S., it's over 460 robots, but there's still tremendous runway given that there are literally thousands of hospitals with orthopaedic practices that we think are candidates. So we see a lot of runway ahead of us with that.

And when we enter into a competitive account, Rick, just to add a little color, often times, it's with one surgeon champion. And it does take time for other surgeons within that facility to express an interest. And so it's one of those curves that's maybe kind of logarithmic, so it starts off quite slowly, and then it accelerates as you have more surgeons at the account expressing an interest and adopting. So I would still say we are in the early stages. Obviously, this is the third consecutive quarter where we feel very good about our growth versus the market. Obviously, not everyone has reported yet, but we feel very encouraged by the progress, not just in the sales of the robot but actually the adoption of procedures. But again, it's still early in our cycle.

Okay. And just a quick follow-up. You highlighted, Kevin, another solid quarter of power tool growth. How far along are we in the System 8 rollout, which, I think, would be a big part of that? How sustainable is that growth? Is it multi-quarter, multiyear? How do we think about it?

Yes, Rick. We're still in the early stages. We really are just a few quarters into the full commercial launch. These tend to have pretty good longevity, multiyear. So you should expect to see very good momentum for the Instruments group, powered by that Powered Instruments portfolio. So early stages of what has historically been a multiyear run rate. And it's clearly being well received based on the type of growth that, that group's putting up.

Your next call comes from the line of Robbie Marcus from JPMorgan.

There were a couple line items that stood out, particularly in Neurotech and Spine. Spine being an area that's underperformed in recent quarters. Maybe you could speak to some of the trends you're seeing in Spine and the overall health of the Spine market. And then, what's driving the strength in Neurotech? Particularly, any new products that you have in that department?

Yes. So I don't think we've seen a meaningful improvement in the Spine market. Pricing did improve in the market, as we referenced on the call, but it's still a challenging market. So we're encouraged, but I wouldn't want to signal for the core Spine business -- our IVF business is doing very well. But for the core Spine business, that market remains challenged. Neuro is doing tremendous, and it's across the Neurotech portfolio. We're seeing very strong growth in hemorrhagic, ischemic as well as the CMS and IVF, as I referenced. Part of it is the product offering, and part of it is the benefit we're seeing from continued market expansion in the ischemic space. We did get PMA approval without having to go to a panel for our flow diverting stent. That was a long journey but thrilled to be able to enter the U.S. market. But it will take some time there to build up inventory, but it does help us further round out that portfolio.

Your next call comes from the line of Chris Pasquale from Guggenheim.

One on MedSurg and then one on Mako for Katherine. First on Endoscopy, growth dipped a little bit there this quarter on an organic basis. Last quarter, it was actually a big source of upside, so it's been a little volatile lately. Just spend a minute on what you're seeing there. And then for Katherine on Mako. I think last quarter, you had said that you'd upgraded about 70% of the installed base. Just give us an update on where that number sits today and what we should expect to see as you complete that process. Can you drive enough new system placements to offset the loss of that upgrade revenue?

So I'll start with Endoscopy. If you look back over the last 2 years, it's been a tremendous grower for Stryker. So it's not just 1 quarter or the last 2 quarters. If you go back quite a ways, it's been a really strong performer really since the launch of the 1588 camera. This quarter, obviously, it dipped a little bit, but it's nothing that concerns us. The sports medicine and the communications business units continue to grow very well in the double-digit range. And from quarter-to-quarter, you can have a little bit of volatility related to capital. We also had a very strong prior year quarter. NOVADAQ will start to roll into organic sales in the month of September. So just a little bit of an impact in the third quarter, and you'll see that going forward. So we feel very good about the leadership we have in our Endoscopy business and that we can continue to see very strong growth going forward, albeit 1 slightly slower quarter this quarter. But it's been a very, very positive business and will continue to be going forward.

Yes. So we remain on track with the goal we stated before, which is to have the vast majority, which is probably something north of 80%, of all the robots upgraded to the Total Knee application. Some are just older robots or dedicated to doing uni-procedures that won't get upgraded. But we're on track to have that largely completed in the third quarter. And if you look at the business in this quarter, the robots, sales at 39 was very high. Year-over-year, we had fewer upgrades than the prior year quarter, which you'll see captured in that other ortho line, and that's because we're that much further into addressing the pipeline. Those tend to go much quicker in terms of the sales cycle versus the robot sales. Again, we think there's probably 4,000 or so robot -- or Orthopaedic practices in the U.S. that are -- the bulk of which are candidates for robots, so we're pleased that we're approaching 500 robots sold in the U.S. and obviously more broadly. But that's a lot of runway still left for us to continue to drive robot sales, and we expect that to continue with that group.

Your next call comes from the line of Vijay Kumar from Evercore ISI.

So I had 2 questions. One may be a high-level, Kevin. I think you touched upon this on your M&A strategy. You guys have been extremely thoughtful, right? You have a really well-honed out strategy. But would you consider being opportunistic if the opportunity should arise on the M&A front?

So again, there's no change to our M&A strategy. We're going to continue to focus on those adjacent and core markets. We think that really enables us to leverage our sales and marketing infrastructure. We've done deals where we've been talking to the target for years. We've been involved with auctions. That happens in an M&A world. But there's no plans to change our strategy as it relates to M&A.

And then one quick question on the guidance. Glenn, on the second half, just given the first half strength, back half of last year, you guys had both the hurricane and the (inaudible) recall. Just to ask, I'm curious why the second half wouldn't be stronger given some of those easier comps.

Yes. No, I think if you think about sort of we're at the midpoint of the year, we've already raised guidance twice. I'm sure there can always be a scenario where things can come in better than what we expected. And we clearly understand that, but we also remain mindful that there's kind of puts and takes that we're going to experience in the back half of the year. And so I think, at this point, we really believe that our guidance accurately reflects our current outlook.

Your next call comes from the line of Larry Biegelsen from Wells Fargo.

One on the recon market, one on Sage. So we estimate the worldwide recon market grew, let's say, a little bit less than 1% in Q1. Do you think -- it looks like based on your report and J&J's, it looks like the market may have bounced back a little bit in Q2. Where are you seeing in the market? What are your expectations for 2018? Is this a market that can still grow 2% to 3%? And I had one follow-up.

Yes, thanks, Larry. I think it's premature for us to speculate on the market growth, given we're talking about tens of basis points sequential differences when we haven't seen the results from Zimmer, who's clearly the market leader, and Smith & Nephew. So I think the market was probably largely unchanged, maybe modestly improved in the second quarter. But again, we really need to see all the numbers come in. There's no change to our fundamental view on the recon market. It is a low single-digit grower. We're really focused on our ability to take market share, particularly on the knee side, where our goal is to capture hundreds of basis points. And like the market, I'm sure that will bounce around quarter-to-quarter. But I think we feel pretty confident that, once again, this quarter, we achieved that goal. So whether it's a 1%, 2%-ish grower, it's going to move quarter-to-quarter, but that sounds about right.

And then on Sage, can you disclose Sage sales in Q2? We estimate Sage sales were about $120 million before the recall in the second quarter of last year. About $60 million in Q3 of 2017. So I'm trying to understand how close you are to the prior run rate. Do you expect to get back to the prior run rate in the third quarter of '18? Because to follow up on Vijay's question, if so, that would add about 2% to your year-over-year growth in the third quarter and about 1% in Q4. So just if you could help us understand just a little bit more precision around Sage, that would be helpful.

Sure. Appreciate the question. We're not going to break out Sage revenue. It's just a level of detail that we're not going to get into. And clearly, they had difficult comps because the recall didn't happen until the third quarter. So we expect to return. The comps help us in the back half of the year to year-over-year growth. But there's also no change to our former comments about winning back customers. Some of them built up inventory with competitive products, and we have work to do to win back some of the customers that we clearly frustrated during this process. We're on track. We have the full portfolio. We've launched the new product. But we don't expect to be truly on offense until next year, and that's no change from our prior comments.

Yes, I'd just add they did have negative growth in the second quarter. And obviously, we're going to have very strong growth for Sage in the third quarter and then a little less strong in the fourth quarter. And obviously, the fourth quarter is a big quarter for all of Stryker, so its impact -- the Sage impact on the fourth quarter will be fairly muted, but certainly a strong impact on the third quarter.

Your next call comes from the line of Glenn Novarro from RBC Capital Markets.

Kevin, in your remarks, you called out another strong quarter out of Trauma and Extremities. Can you give us a little bit more color on what is happening there, where the share is coming from? And particular, some color on specifically the Foot & Ankle business. And then I had a follow-up for Glenn.

So the extremities as a whole, whether it's foot and ankle or shoulder, was again the engine of growth for our Trauma and Extremities business. Overall, as you've seen over the past 4 or 5 years, we've had terrific growth in absolute terms as well as versus the market. We had very strong comps from the prior year, but yet still posted a very strong number. So it's been a multifactorial story here, where we've filled out a Foot & Ankle portfolio that's been strong double-digit growth for multiple years. We now have a nice shoulder portfolio. That's -- even though a small business, it's contributing robust growth. And then, we've been converting hospitals, and we've had a pretty good track record over the past few years of being able to convert entire hospitals, which is really more in the Trauma area. So it's been a broad-based program across the Trauma and Extremities business and a multi-quarter, multiyear success story. So we're very pleased with where we are with that portfolio, and we look forward to continuing to grow.

And then just -- Glenn, just real quickly, you're raising your full year EPS by the level of the 2Q beat, but then you're absorbing an incremental $0.03 of an FX headwind. So what's allowing you to absorb the incremental $0.03 in the back end of the year?

Yes. No, it's really a couple of things, but the 2 big things that really stand out are, first of all, our continued strong sales performance. And so obviously, we raised that guidance, and we expect in the back half of the year to continue on the same sort of sales trajectory that we're on. And then the other one I would say is our confidence in op margin delivery. And we're continuing to deliver at the higher end of what we put out as the minimum 30 to 50 basis points. And so I would say the combination of those 2 things more than allows us to absorb the FX impact.

Your next call comes from the line of Isaac Ro from Goldman Sachs.

Just wanted to come back to the recon business first. And specifically, if we put aside Mako and think about just sort of the U.S. knee business, kind of curious what you're seeing in terms of opportunities. Some of your competitors seem to be struggling a little bit. And I'm wondering, if we look on the forward as the year closes out, what you guys can do to try and take a little bit of share opportunistically.

There's really no change to the offense here. We're going to continue to drive Mako robot sales and continue to drive them both into our existing customers and into competitive accounts. We have a really nice portfolio on the knee side with our 3D-printed products. We'll also be better positioned if we get the instruments out for a full launch of our 3D-printed hip cup. And so no change in the offense regardless of the competitive dynamics. I think what you're just seeing, though, is greater variability in terms of recon growth rates from the major players relative to what we've seen historically. And I think that trend probably continues, but we're going to continue with our offense that's been working well.

Your next call comes from the line of Raj Denhoy from Jefferies.

This is Anthony in for Raj. Just maybe sticking on the Mako theme. I'm just wondering, in the accounts where physicians were trained maybe a year ago, how are the volumes of Mako implants from those physicians that are a little bit aged at this point? And then a follow-up would be, what is the overall knee share in those accounts? It sounds like there's a bit of a halo effect. And then lastly, just on the data readouts this year and next. Just maybe a little bit of color on sort of the extent of data that you would expect to have out at the 2 upcoming meetings. And then I have one follow-up.

Yes. I'll try and give some color. It's probably not going to be the level of detail you're looking for, and we've tried to stick with some of those key metrics when we give the Mako updates. But as we mentioned, we are seeing continued year-over-year and sequential improvement in utilization rates on the robot. That's all in, and it was up about 55% year-over-year. So clearly, those surgeons who were trained, they're continuing to ramp up, and that's what we've seen over a period of 8, 12, 18 months. As they get more and more comfortable, they continue to do more and more cases on the robot, and I think that trend will continue. We don't know all of the data that will be coming out, but we do expect, as you look later in this year at AAHKS in November and then certainly at Academy next year for there to be some more meaningful clinical data as we've been collecting, as well as posters from others. But we're just too far out right now to know exactly what's been accepted. But you should assume we're starting to enter that period where there'll be more and more clinical data around Mako and the Total Knee.

And then just to follow up on NOVADAQ and Endoscopy. Just wondering how that played out in that number, just given just sort of the sequential trend there a bit soft relative to our model.

So NOVADAQ continues to do really well. We're actually very pleased. We are on plan. Keep in mind that this acquisition was really about getting the technology and putting it in the hands of our Endoscopy sales force. So there was always anticipated that there would be an initial slowdown before a reacceleration in the revenue, which is exactly what has played out. We've been really pleased. We started the year with the combined sales forces trained, aligned incentives and going after customers. So we're really pleased with NOVADAQ, but there was always going to be an initial hiccup because we ended up taking out a lot of sales reps as we brought the technology into our organization.

Yes. So any softness that you see in Endoscopy is really more linked to the core camera business, not to NOVADAQ. We're actually very pleased with the second quarter performance and continue to be very bullish about this acquisition.

Your next call comes from the line of Richard Newitter from Leerink Partners.

Maybe just to start off with the hip franchise. Katherine, you had alluded to the 3D-printed Trident, too. I think you said once you get Instruments sets more out into the field that should have an impact. What's the timing there for when we could really start to see an acceleration? And if you could provide some commentary around how we should think about the potential for this product launch to potentially get your hip growth reaccelerated the same way that we did the last time you had a major hip cup launch, where you started to accelerate and sustain above-market growth for multiple years.

Yes. So keep in mind, Accolade II was a hip stem and that tends to be more impactful. With respect to this new 3D-printed hip cup, which is a great product, and certainly having new technology for the sales force is always a bonus. I think you'll start to see an impact in Q3. But whenever you launch a new product into the hip or knee market, as you've seen over the years, it tends to be a gradual ramp-up. And so we're in that process right now. We just went to full commercial launch at Academy. And now that follows with getting the instruments out there and building up that. So I think you'll see some impact in the third quarter. Our hip business has been growing mostly in line with the market, and hopefully, this helps accelerate that. But I don't want to get too far in front of us as to the timing of that, but certainly, we feel like this is a product that will help.

Your next call comes from the line of Craig Bijou from Cantor Fitzgerald.

I wanted to get your updated thoughts on the Spine business and especially given some of the dynamics that you guys talked about. The core Spine under pressure. You had success with the Tritanium, the new product. Overall, a challenged market. But I know you've been asked the question before, but how are you thinking about developing new products versus potentially growing through acquisitions, whether large or small? And then if it is in-house development, maybe you can walk through some of the planned projects or at least the areas of Spine that you're looking at.

Yes. So I'll start by saying really reiterating some of my earlier comments. It remains a tough market, and it has been challenging for the market overall. But it's a market we are 100% committed to. It is the largest market in Orthopaedics. There's tremendous unmet need. And we have the benefit, given our size and the diversity of our product portfolio that we can weather through when a certain business is challenged as Spine has been. We are encouraged modestly by the results. We do need to continue, and we are. We've allocated more R&D dollars to continue to refresh our core portfolio. Our Tritanium product has been terrific, but there's a portfolio beyond that, and we're investing heavily in that. With respect to the M&A component, again, no change. All of our divisions have dedicated BD people looking at targets, and we're always evaluating and making that make-versus-buy decision. So we're committed to this market, and we're committed to growing it organically. Whether or not we do an acquisition, same answer for any of our divisions, we'll evaluate targets and make the best decision to ensure that the returns are optimizing our commitment to shareholders.

Your next call comes from the line of Matthew O'Brien from Piper Jaffray.

This is Will on for Matt. My first question, I apologize if I missed this in the opening remarks, but how many U.S. hospitals have a Mako install? And then, I guess, further, given the cementless application that was approved in the fourth quarter, I think you mentioned that exiting 2017, cementless represented 24%. Where is that currently? And I assume it's trending up, but any clarification there would be helpful.

Sure. So in the U.S., at the end of the second quarter, we had 462 robots in the field. You should assume the majority of those are single robots, given where we are in the launch. We do have some hospitals like the Hospital for Special Surgery, for example, in New York that has 4. They're more the exception. But again, as a robot gets in there and more and more surgeons start to show interest, we tend to see those accounts start to look to add robots, and that will continue. I don't have the exact breakdown, but you should assume the majority, though, are single robots. With respect to cementless, we continue to see market adoptions. About 26% of our knees now are cementless.

Your next call comes from the line of Josh Jennings from Cowen.

I was hoping to just ask one question on margins and one question just on the total joint business. Just the core operating margin performance seemed to be stellar this quarter. I think the expectations were for you to get to the top end of the range in the second half of the year, which excluding the acquisition impact, pretty much you had an 80 basis point expansion quarter in Q2. Were there any one-timers in Q2 that drove that performance? And then should we still be thinking about the second half being close to the top end of the range, as I think you guided to at the beginning of the year?

Yes. No, if you sort of dissect the 50 basis points performance, which, by the way, includes covering a 30 basis point headwind coming from acquisitions, it really is across the board. Obviously, a lot of this is coming from some of our CTG programs that are really starting to pay off, specifically our indirect purchase programs and as well as some of our shared service programs. But the other thing, too, I would tell you is that we've really instilled this mindset within the organization, and we've aligned our incentives to focus on driving these improvements. And we're really seeing great results across all our divisions.

And there were no unusual one-timers in the quarter. It was really a terrific performance across the businesses.

Your next call comes from the line of Jeff Johnson from Baird.

I wanted to ask a Neurotech question or, I guess, a couple questions in Neurotech. I guess, just one, as we kind of move from 8- to 24-hour treatment protocols, just kind of an update on where we are in infrastructure and, like I said, protocols, things like that across the industry. Are we seeing progress there? And on Surpass, Katherine, I know I heard you say you don't take a couple of quarters to get inventory, but that rounds out kind of the last 15% or so, I think, of what you needed to cover in hemorrhagic. Is there anything else in the pipeline we need to be thinking about? Anything that could help reduce anti-platelet therapy? Or anything else that we could see coming on, on the stroke side over the next year or 2 from you guys?

So we're clearly really excited about the performance across the Neurotechnology platform and as well as Neurovascular and hemorrhagic and ischemic. And it's incredibly difficult to say this much growth was attributable to the expanded indications, but there's no doubt it's helping. It allows us to get patients to the right treatment center in a manner that allows for intervention. And it really does underscore the efficacy of the data, which is based on stentrievers. We are launching our aspiration device. That further enhances our portfolio. Clearly, the data is all around stentrievers, and we believe that is the primary methodology. But there are some who opt to aspirate alone, at least initially, although about 40% to 60% of the time, they do need to go back in with a stentriever. But this will allow us to address that patient, that surgeon group. And so this is a market that has a lot of innovation. So I have no doubt there will be more stuff coming but nothing I would call out at this time.

(Operator Instructions) Your next call comes from the line of Kyle Rose from Canaccord Genuity.

This is Brandon in for Kyle. Just to kind of keep on Mako. As we move through the rest of the year, competition in robotics should start to pick up, if -- at least at a minimum maybe cause some more noise in the market. Can you speak to what, if any, really competitive noise is built into your guys' assumptions for the rest of the year in terms of Mako? And then I had one other Mako follow-up.

Yes, we really don't have anything built in for the outlook. Those products have to get launched, and we have to see what the features are. I'd say -- I would tell you, we're just really focused on the features and benefits of our robot, which we believe are comprehensive and have enabled us to drive some very robust share gains and continued uptake on a quarter-to-quarter basis. So no change in our outlook. We're never going to underestimate competitors, but with nothing on the market yet, it's difficult to speak to differences in the technology.

And I would say we are very pleased with the robot sales, the actual number sold in the second quarter. And the level of interest is still extremely high. So I expect continued strong robot sales regardless of competitive activity.

Okay. And just one last one on Mako, more thinking long term. And really appreciating that there's still plenty of leg room for Mako in Total Knees. Can you maybe just speak to the near-term plans or long-term plans to expand the usage of Mako into other procedures? And one, I guess, that I would specifically ask, the one that comes to mind is in Spine cases, given that that's a market that's really just starting to develop.

Sure. We absolutely believe there's opportunities for the Mako technology in other indications within joint, spine, shoulder. But in terms of time lines, we're not going to get specific at this point in time. We do believe there'll be follow-on opportunities, but right now, the primary focus is really in optimizing the Total Knee launch.

Your next call comes from the line of Steven Lichtman from Oppenheimer & Co.

I just have one question and one follow-up. First, on the macro front, what are your latest views on the state of the capital purchasing environment in the U.S.? Anything of note there or are things stable? And separately, how do you see things progressing in the U.K. following some restrictions on elective procedures earlier in the year?

Yes. So we feel good about the capital market in the U.S. Just look at the momentum we're delivering in our Medical business, selling 39 robots, which is certainly high-ticket capital, continued uptake for our Instruments, power tools. So capital encompasses a lot of different price points and a lot of different technologies, but our capital business is doing really well. We're past the bed blockage that we saw in the first quarter, which was very specific to the flu season.

Yes. Europe really had a terrific second quarter, and this year, once again, will be accretive to Stryker's overall growth rate, which it has been every year since we launched the Transatlantic Operating Model.

Okay, great. And then, I think you alluded to this when you gave us Mako metrics, but I was wondering if you could talk about trends in utilization in partial knees. Does that application continue to expand for you?

Yes. It's much more the Total Knee story. Obviously, the partial is much, much further in its life cycle, and it's a much smaller market. So keep in mind, the utilization rates I gave you were for all procedures on the Mako robot, that roughly 55% change year-over-year. But it's driven more and more by the Total Knee because it represents well over 50% of all the procedures that are happening on the robot.

There are no further questions at this time. I will now turn the conference over to Mr. Kevin Lobo for closing remarks.

Thank you all for joining our call. Our conference call for the third quarter 2018 results will be held on October 25. Thank you.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.