Stryker Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
July 26, 2022

There are 17 speakers on the call.

Operator

Welcome to the Second Quarter 2022 Stryker Earnings Call. My name is Hannah, and I will be your operator for today's call. At this time, all participants are in a listen only mode. Following the conference, we will conduct a question and answer session. This conference call is being recorded for replay purposes.

Operator

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 ks followed today with the SEC. I will now turn the call over to Mr.

Operator

Kevin Lobo, Chair and Chief Executive Officer. You may proceed.

Speaker 1

Welcome to Stryker's 2nd 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 updates on Mako and Vocera. Glenn will then provide additional details regarding our quarterly results before opening the call to Q and A. For the quarter, organic sales growth was 6% with high single digit growth from our MedSurg and Neurotechnology businesses, Lead by Endoscopy, Instruments and Neurocranial.

Speaker 1

Our hip and knee businesses delivered high single digit growth in the face of tough comparables from 2021. Internationally, we posted high single digit organic growth With strength in Canada, Europe and Japan, as well as double digit organic growth in emerging markets despite the China COVID related slowdown. During the quarter, we continued to have robust demand for our capital products. However, we had meaningful shipment delays As a result of ongoing product supply challenges, mostly affecting our large capital businesses. As a reminder, Less than 10% of our revenue is large capital, with about 15% of our revenue being smaller Operating capital that drives revenue for hospitals.

Speaker 1

For the quarter, we delivered adjusted EPS of $2.25 As we faced increasing negative impacts from foreign exchange as well as inflationary pressures and significant premiums on inventory spot buys. We expect these pressures to continue in the back half of the year. However, the supply situation is improving. Given the higher input costs, we've begun to take a series of pricing actions across our portfolio. These will take time to be reflected in our results given the phasing of contract renewals in many areas of our business.

Speaker 1

We continue to invest in R and D at a healthy ratio of sales, demonstrating our continued focus on new product pipelines. We remain confident in the outlook of our business and expect to continue to deliver sales growth However, even with disciplined spending, the worsened foreign exchange situation and other pressures will prevent us from delivering leverage to earnings in 2022. With half of the year behind us and a very strong order book, we now expect full year organic sales growth of 8% to 9%. And due largely to foreign currency exchange, we now expect adjusted earnings per share to be in the range of $9.30 to $9.50 per share. Overall, our team has shown good resiliency and we are on track for another strong year of sales growth.

Speaker 1

Our employee engagement remains very high And we continue to win awards as a great place to work, most recently as a great place to work for millennials by Fortune. We are also gearing up for some exciting new product launches in 2023 and look forward to an improved supply chain picture. Through the many challenges that we had faced since 2020, we feel optimistic about how we are positioning ourselves for the future. I will now turn the call over to Jason.

Speaker 2

Thanks, Kevin. My comments today will focus on providing an update on the current environment, including the procedural and geographic trends during the quarter. In addition, I will provide an update on the integration progress of the Vocera business. Procedure volumes continued to recover throughout the Q2 in most countries. While we are seeing volumes recover, Hospital staffing pressures have continued impacting the ability to reduce procedural backlog in a meaningful way.

Speaker 2

These challenges will likely continue, meaning the tailwind of pent up demand will be more moderate, but last longer. Geographically, procedural volumes steadily improved during the quarter in the United States, Europe and Latin America. Procedural trends in parts of Asia and Australia have been more volatile due to ongoing COVID related impacts. In addition to the continued procedural recovery, we had a strong quarter of Mako installations, up 19% versus 2021. However, as we are balancing customer purchasing preferences, the mix of these deals has resulted in less revenue per quarter.

Speaker 2

We are pleased with how the growing installation base continues to fuel market leading implant growth. The order book remains strong for Mako and the percentage of implants using the robot continues to increase. We will update you on our installations and utilization metrics at the end of the year. Demand for our capital products remained very strong in the quarter. While we experienced solid customer order performance from our capital businesses, the sales growth was restricted because of ongoing headwinds, which included raw material shortages primarily related to electronic components and installation delays in parts of our business due to hospital staffing challenges.

Speaker 2

The raw material shortages continue to be most impactful In our medical business, both within our acute care and emergency care business units. Based on our current supply outlook, we expect medical to have a strong second half. Now to our key integration activities. We continue to be pleased with the momentum of the Vocera integration. Since acquiring the company, we have seen double digit growth in the 1st and second quarter versus the same periods in 2021.

Speaker 2

We are already starting to realize synergies and remain excited about the potential this product will create for both Stryker and the customers we serve. In summary, while the macroeconomic environment remains volatile, procedural volumes are improving and the underlying demand for our products remains strong, which gives us confidence in our ability to continue to drive strong growth. With that, I'll turn the call over to Glenn. Thanks, Jason.

Speaker 3

Today, I will focus my comments on our Q2 financial results and the related drivers. Our detailed financial results have been provided in today's press release. Our organic sales growth was 6.1% in the quarter. The 2nd quarter's average selling days were in line with 2021. The impact from pricing in the quarter was unfavorable 1.4%.

Speaker 3

Foreign currency had a 3% unfavorable impact on sales. Despite a challenging comparable versus 2021, our organic sales growth has been solid and was led by double digit performances in our endoscopy and instruments businesses as well as strong growth in our international businesses. Our sales growth has been somewhat constrained by the continued supply chain challenges and electronic component shortages, especially impacting the capital products in our MedSurg businesses, primarily in our medical business. Our capital order book continues to be very robust as demand from our customers continues to be strong. In the quarter, U.

Speaker 3

S. Organic sales growth was 4.7%. International organic sales growth was 9.7%, impacted by positive sales momentum across most of our international markets, Specifically, emerging markets, Canada, Japan and Europe, somewhat offset by lingering COVID impacts in Australia and China. Our adjusted EPS of $2.25 in the quarter was in line with 2021, driven by our sales momentum and favorable adjusted tax rate, offset by gross margin challenges and the impact of foreign currency exchange. Our 2nd quarter EPS was negatively impacted by foreign currency exchange of $0.05 versus 2021.

Speaker 3

Now I will provide some highlights around our segment performance. In the quarter, MedSurg and Neurotechnology had constant currency sales growth of 10.6% With organic sales growth of 7.9%, which included 7.2% of U. S. Organic growth And 9.9 percent of international organic growth. Instruments had U.

Speaker 3

S. Organic sales growth of 12.1%, led by double digit growth in our orthopedic instruments and surgical technology businesses. From a product perspective, sales growth was highlighted by double digit growth in Power tools, surge account, irrigation, smoke evacuation and SteriShield. Endoscopy had U. S.

Speaker 3

Organic sales growth 15.4%, reflecting very strong performances across all of their portfolio, including video products and double digit growth of our Communications and Sports Medicine businesses. Medical, which includes our recently acquired Vocera business, At a U. S. Organic sales decline of 2.4%, driven by the aforementioned supply chain challenges primarily impacting our emergency care products, Medical Sage and Acute Care businesses posted double digit organic growth. During the quarter, we also saw significant growth in orders for our beds and emergency care products driven by very strong customer demand.

Speaker 3

Our U. S. Neurovascular business posted an organic decline of 1.8%, driven by a strong double digit comparable in 2021 as well as competitive pressures, disruptions due to hospital staffing shortages and softer market conditions in part because of supply shortages of contrast use and procedures. The U. S.

Speaker 3

Neurocranial business posted organic sales growth of 9.4%, which included solid growth in our ENT navigation, Internationally, MedSurg and Neurotechnology had organic sales growth of 9.9%, reflecting double digit growth in the endoscopy, neurovascular and neurocranial businesses, somewhat offset by medical. Geographically, this included strong performances in Japan and Emerging Markets. Orthopaedics and had both constant currency and organic sales growth of 3.9%, which included organic growth of 1.6% in the U. S. And 9 point 5% internationally.

Speaker 3

This reflects the impact of strong international growth and solid growth in our hip, knee and extremity businesses. Our U. S. Hips business grew 4.5 percent organically, reflecting strong primary hip growth reflected by the recent launch of our Insignia hip stem And continued procedural growth. Our U.

Speaker 3

S. Knee business grew 5.3% organically, reflecting our market leading position in robotic knee procedures. Our U. S. Trauma and Extremities business grew 3.1% organically against a significant comparable in 2021.

Speaker 3

This growth was led by double digit growth in our upper extremities, somewhat offset by softness in the trauma market. Our U. S. Spine business declined 3.6% organically, reflecting a slightly slower scoliosis season, partially offset by solid performance in our Enabling Technology business. Our U.

Speaker 3

S. Other ortho declined organically by 13.8 primarily driven by the impact related to the aforementioned deal mix changes of Mako installations in the quarter. Internationally, Orthopaedics and Spine grew 9.5% organically, which reflects the strong momentum in Europe as procedural volumes improve as well as strong performances in Japan, Canada and India, somewhat offset by COVID related volatility in Australia and Korea. Now I will focus on operating highlights in the Q2. Our adjusted gross margin of 60 3.3% was unfavorable approximately 2 70 basis points from the Q2 of 2021.

Speaker 3

Compared to 2021, our gross margin was adversely impacted by the purchases of electronic components at premium prices on the spot market And other inflationary pressures, primarily related to labor, steel and transportation costs, as well as operational efficiencies due to the component We expect these adverse impacts to continue throughout 2022. We expect Q3 gross margin to be similar to Q2. Q4 should see some improvement and the full year gross margin compared to 2021 will be negatively impacted by approximately 200 basis points. Adjusted R and D was 7.2 percent of sales, which represents a 60 basis This reflects our continued commitment to innovation funding and the related future growth that we'll provide. Our adjusted SG and A was 32.4 percent of sales, which was 100 basis points lower than 2021.

Speaker 3

This reflects continued cost discipline, somewhat offset by the ramping of certain prioritized expenses and hiring that support future growth. In summary, for the quarter, our adjusted operating margin was 23.7 percent of sales, which was approximately 220 basis points unfavorable to the Q2 of 2021. This performance is primarily driven by the aforementioned inflationary impacts resulting in gross margin challenges and the net negative impact resulting from foreign currency. Adjusted other income and expense decreased From 2021, primarily resulting from an equity investment gain and favorable interest income. We anticipate a normalized run rate of adjusted OI and E to be approximately $70,000,000 per quarter for the remainder of 2022.

Speaker 3

Our Q2 had an adjusted effective tax rate of 13.9%, reflecting the impact of geographic mix and certain discrete tax items. We now expect our full year adjusted effective tax rate to be in the range of 14.5% to 15%, which is consistent with the ETR performance we experienced in 2021. Focusing on the balance sheet, we ended the 2nd quarter with $1,100,000,000 Cash and marketable securities and total debt of $13,400,000,000 Approximately $450,000,000 of debt was paid down in the quarter. Turning to cash flow, our year to date cash from operations is 732,000,000 This performance reflects the results of net earnings and continued focus on working capital management, partially offset by the Considering our Q2 results, the strong order book for Capital Equipment and the sales momentum in our implant businesses, We now expect full year 2022 organic sales growth to be in the range of 8% to 9%. This performance assumes that the market environment Experience in Q2 continues to improve throughout the rest of the year with supply chain disruptions easing in the back half of the year.

Speaker 3

If foreign currency exchange rates hold near current levels, we expect net sales in the full year to be adversely impacted by approximately 2% to 3% And adjusted net earnings per diluted share to be adversely impacted by approximately $0.25 to $0.30 in the full year, which is included in our revised earnings guidance range. Based on our performance in the Q2, including consideration of the continued Supply chain challenges and the inflationary environment, together with our increased sales guidance and continued financial discipline And most significantly, the anticipated future impact related to foreign currency, we now expect adjusted earnings per share to be in the range of $9.30 to $9.50 The low end of this guidance range assumes that the continued macroeconomic volatility persists, including procedural disruptions and worsening of the electronic component availability. We will continue to evaluate the changing And now, we'll open up the call for Q and A.

Operator

We kindly ask that you limit your questions to 1 with 1 follow-up. The first question is from the line of Robbie Marcus with JPMorgan. Please proceed.

Speaker 4

Maybe I'd start on second half. It's sort of like a tale of 2 cities where you have this really strong top line and somewhat of a pressured bottom line. And moving organic sales guidance up 100 basis points is great to see. But it does look like Roughly 2 thirds of EPS down move is currency a little bit from operations. So maybe just walk us through It sounds like medical is going to get a good chunk better in the second half.

Speaker 4

Maybe just give us a little color of how you get the confidence To raise the top line and where exactly you're seeing the softening operating margin constant currency.

Speaker 1

Yes. Sure, Robbie. This is Kevin. I'll take that. So first of all, feel very good about the momentum that we have across all of our businesses.

Speaker 1

Medical for sure is going to have a much better second half. They were the division that was most affected by the shortages. We do have a line of sight Towards the supply of key electronic components and we're going to ramp up as fast as we can to meet That demand, but we also have softer comps. The 2nd quarter was by far the most difficult comparative from the prior year. So we have softer comps across Frankly, all of our businesses in Q3 and Q4 and the order book not just for medical, but if I look at the other MedSurg businesses like instruments and endoscopy, which both had terrific Q2, they're going to continue to have strong growth in Q3, Q4.

Speaker 1

So we obviously feel very good about The demand from our hospital customers, that gives us the confidence to raise our sales growth. We exited first half at 7.5% With a very tough Q2 comp, so we feel pretty good about getting to the 8% to 9% on the top line. On the bottom line, as you can see, based on the change in our guidance from last quarter, $0.15 if you look at the midpoint of our range, dollars 0.15 of our drop is due to foreign currency. So that's the majority The adjustment on the EPS line and we're really fighting through significant supply chain challenges and inflationary pressures. And right now, obviously, taking it on the chin for our customers, at least for this year.

Speaker 1

And but we are taking obviously, starting to take Pricing actions, those we won't see a lot of that in this year. It will start to roll kind of more into next year. But I'd say the majority of our takedown is due to foreign currency, But obviously, very significant supply chain pressures that we're dealing with, but a very strong demand situation overall.

Speaker 4

Great. Maybe as a quick follow-up, Kevin or Glen, I'm Getting a little greedy here, but I'm already looking out to next year. And we've heard from a number of companies that have reported so far to Use 2022 as a base year. Don't treat it as a one time easy comp. And I look at sell side numbers for next year and it's about 100 basis points of Operating margin expansion.

Speaker 4

So I know nobody's good enough to forecast next year yet, but Do you have any early thoughts on 2023 margins? Are you committed to growing margins next year? And just if you have any color on Your interpretation of the where the sell side sits right now. Thanks.

Speaker 1

Yes. Thanks, Robbie. As you can imagine, a lot has changed in the last 6 months. A lot could change in the next 6 months. And as you know, we always give guidance in January, which we'll do.

Speaker 1

But what I will say is the Spot buy situation has been pretty significant. It's been a big part of our gross margin negative story for this year. That is starting to abate. I would hope that that gets better next year. But obviously, we'll update you in January in terms of the overall outlook.

Speaker 1

I would not call this year an easier from the top line comparative. Driving organic growth of 8% to 9% is pretty heavy, But we do have a lot of very exciting launches next year. We have System 9 for power tools, 1788 camera launch, a Lifepak Defibrillator launch, a Neptune S, which is a smaller version of Neptune for GI and ASC, those are all really outstanding launches. So I do expect that The top line will continue to for Stryker next year. The bottom line, like we're going to work through these challenges and we'll have more to talk about in January.

Operator

Thank you. The next question is from Lawrence Siglson with Wells Fargo. Please proceed.

Speaker 5

Good afternoon. Thanks for taking the question. Just wanted to follow-up on the capital environment comments. Kevin, maybe just a little more color on what you're seeing with the large and small capital. And your comments on the Mako deal mix changes, I assume that's because hospitals are preferring volume based agreements.

Speaker 5

So why do you think that behavior is changing? I mean, I think People on the call might that may give people a concern that there is some change in the hospital capital environment. And I have one follow-up.

Speaker 1

Yes. Larry, first of all, on the Mako side, what I would tell you is, this is not a new trend. This has been happening over the past kind of 6 months, Where we're seeing more deals being financed versus outright purchased and actually a move towards more rental agreements. And if you have a rental agreement, You can't recognize all the revenue upfront. Even in some of our overall finance deals, we could recognize more of the revenue upfront.

Speaker 1

In a rental, the customer has the right to return the product, So you can't record all of the revenue upfront and that's what our competitors are also offering. We're not really worried because we've had virtually no returns Once we get our products in and you can tell by our utilization of Mako, which again we'll report on at the end of the year, we have highly utilized machines. And so But that's really that's a shift that's been ongoing. It was a new factor this quarter. We're really pleased with the number of installations, but the revenue per Unit that we can recognize upfront is lower and we'll be able to recognize more of this revenue over the life of the contracts.

Speaker 1

And then as it relates to the rest of the capital equipment environment, what I'd tell you is, we wouldn't be taking up our sales if we felt that the capital environment was softening in any way shape or form. The small capital is needed to be able to do procedures. Power tools wear out, cameras need to be replaced. And the medical business is continuing to get fantastic order growth, Whether it's on the defibrillator or power cots as well as our precurity bed, the orders are continuing to really pour in. We're not seeing hospital construction projects being halted at all.

Speaker 1

And look at our communications business, which is a large capital business. They They had a terrific quarter in the Q2 and their order books continuing to grow. So the timing of construction may get delayed a quarter or so, but no one's canceling these Nobody is canceling any of our orders. So we're feeling at least for the through the end of this year, feeling pretty bullish about the overall environment. Hospital liquidity is still strong.

Speaker 1

Now, of course, they're feeling pressure on their profits, but their liquidity is in a healthy position. And that's really where The source of funding comes for capital.

Speaker 5

That's very helpful. And Glenn, thanks for the color on the gross margin. Kind of plugging the numbers into the model, it implies that OpEx growth is low is called mid single digits year over year in 2022 On a reported basis. I don't know if my math is right, but how do you do that in an inflationary environment where you're growing sales 8% to 9% organically. Thanks for taking the questions.

Speaker 3

Yes. Larry, that was quick with the model. A couple of things to keep in mind, we are seeing really good performance In our operating expenses, especially SG and A, single biggest driver in SG and A is really sort of hiring And how prudent are we being about our hiring and the related costs that come along with every time we add a new employee. So We positioned ourselves pretty well relative to that halfway through the year here and feel confident that we'll be able to drive sort of meaningful leverage within our SG and A. I mean that being said, we are also mindful that we need to invest in R and D to make sure that we can hit a lot of these key product launches that were lined up for next year.

Speaker 3

And then honestly too, if you move on down the rest of the P and L, I think I kind of gave you a little bit of guidance on OI and E and we're also seeing favorable performance in our ETR, which helps at the bottom as well.

Operator

Thank you. Our next question is from the line of Vijay Kumar with Evercore. Please proceed.

Speaker 6

Hey guys, thanks for taking my question and congrats on a good mix here. Maybe Kevin, One on the guidance here, the organic was raised by 50 basis points versus the prior guidance. I think The press release had some commentary about the guide raised was based on strong capital orders. Is the guide assuming The capital sales trends to improve in the back half as the supply chain improves or Are we still looking at perhaps a constrained supply chain environment in the back half? And you did mention implant strength.

Speaker 6

I couldn't help but notice the hip strength and you had new product launch in hips. Are we seeing share gains within hips?

Speaker 1

Well, let me start with the hips. We're feeling really great about our hip business. As you know, the Insignia launch is a very big launch. It's not actually even fully launched. So We are still deploying sets out in the field, but the customer feedback has been overwhelmingly positive and that also is compatible with the Mako robot.

Speaker 1

The Mako robot utilization for hips is also increasing pretty significantly, which is exciting. That's due in part to the hip 4.0 software that we launched About I guess about 2 or 3 quarters ago. That new software combined with this hip stem, I believe will position us We're growing above the market in hips. Not everybody has reported yet, so let's see how that plays out this quarter. But we're really only getting Started with that stem launch and very excited about the hip business.

Speaker 1

What was the first part of the question? Capital and Yes. So on the first part of your question was on capital. So clearly, medical is going to improve in the second half versus their performance. They were down organically In the first half of the year, they're going to be up pretty significantly in the second half of the year because they were the most affected by the shortages of electronics.

Speaker 1

We still even though we're guiding to this 8% to 9%, that doesn't assume that we completely bleed everything. We're still living in a bit of a tough environment out there. And so there is that risk ongoing That might move us towards the lower end of the range or move us up to the higher end of the range. On the implant side, we're feeling pretty good about procedures are largely back to normal in most Parts of the world, and really it's about the hospital staffing. If that staffing gets better, then obviously there's a lot of pent up demand for procedures and We're feeling very good about our position in those businesses.

Speaker 6

That's helpful comments, Kevin. Maybe one for Glenn here. I think Your updated guidance, this seems 200 basis points of gross margin impact. I think the prior guide was 100 basis points. That's almost an incremental, I think, if I'm doing the math right, dollars 0.35 to $0.40 impact.

Speaker 6

So along with FX impact of $0.15 that's almost Increment of $0.50 that Stryker is eating. Are you holding back Glenn on the expenses? And Is that enough to sustain the 8% to 9% growth or maybe just talk about within the P and L where you're comfortable toggling the model We can still achieve the sales growth metrics.

Speaker 3

Yes. I think a couple of things. First of all, this backlog of orders really gives us a lot of confidence that we have the sales in place To deliver on this increased sales guidance, as a baseline, it also implies that we've spent A lot of money on the spot buys and electronic components and pre buying other inventories, so that we feel Confident and comfortable that we actually have the right sort of supply and raw materials in place to deliver on These future sales. I mean that being said, we are mindful and being a good steward of the operating expenses And not letting that get away from us. I think that's prudent just given the current environment and given the environment that we might be heading into.

Speaker 3

And We haven't really taken our foot off of that pedal in terms of controlling that at all for the whole year.

Speaker 2

And

Speaker 3

so I don't expect that that will change in the back half of the year. If you look at like sales force hiring, it almost Universally occurs for the most part in literally the 1st month of the year for every single division. They fill out their sales forces at that point in time. So So I don't feel like there's a big gap that I'm staring down that can't really deliver on the sales growth. I think the name of the game is really Going to be delivering for our customers, these finished products based on what we have In our supply chain and what we currently have in inventories and that's going to really drive that sales growth number.

Operator

Thank you. The next question is from the line of Pito Chickering with Deutsche Bank. Please proceed.

Speaker 7

Hey, good afternoon, guys. Thanks for taking my questions. It makes execution in pretty tough markets. You've been pretty crystal On this call, that CapEx demands, it remains very robust.

Speaker 8

But

Speaker 7

a lot of large non profit health systems have a September 30 year end. And Because of the margin pressure facing hospitals due to labor, we've heard some discussions around CapEx reductions beginning with our fiscal 2023 budgets, which begin in the 4th quarter. So do you assume any changes of the macro CapEx environment when hospitals update their CapEx plans for this calendar Q4?

Speaker 1

Yes. Right now, we're not baking in any major changes. Certainly, if you look at prior Situations where hospitals were under fire, we really didn't see much of an impact at all in the small capital area. The one area you could see some impact would be In the larger capital, but of course a lot of our business we do have financing through Stryker Flex Financial, which does help with Offsetting the kind of pressures that the hospital has in terms of overall capital. And as I mentioned earlier, coming out of the out of 2020 with CARES Act funding, Liquidity of hospitals is actually pretty good right now.

Speaker 1

So with our portfolio mix, I think we're in good shape. If you think about something like Mako, it's still early in the cycle And hospitals are really anxious to get that product. It's not like they have old Makos that they're trying to upgrade and change. They're looking at increasing adoption early in a cycle. So I think our portfolio lends itself very well to what hospitals need and they're going to prioritize our capital and potentially not prioritize other people's capital.

Speaker 1

Now you could say that's an optimistic outlook, but just The way orders are continuing to stream in, and we haven't had really any orders canceled. And we don't have a history of that In our company. So do I have great visibility into the second half of next year? No. Do I have really good visibility through the end of this year and Probably into the early part of next year, yes, I think we do.

Speaker 7

Okay. Fair enough. On the same topic, the parcel is under pressure just from labor. Like you talked about sort of getting some price increases versus normal decreases. I'm just curious and I do understand it takes time for contracts to sort of roll off.

Speaker 7

But Are you seeing any RFPs sort of today or in the last few months, which is showing confidence that hospitals are willing to absorb this price increases to offset your increased It leaves our pressures. Thanks so much.

Speaker 2

Yes, Pito, it's Jason. So I'd say a couple of things. I mean, we're not For competitive reasons, going to get into the various tactics around pricing and those things. But I will say, we see some shoots of Confidence, if you will, in terms of customers willing to take price and they understand the environment that we're working in, right? So It's going to look to your point very different depending on the business that we're talking to.

Speaker 2

On the implant side, you've got The contract cycles and some of those things. But then there's also the MedSurg side that has historically gotten priced, right? And we continue to expect that we will

Operator

Thank you. The next question is from the line of Matthew O'Brien with Piper Sandler. Please proceed.

Speaker 9

Afternoon. Thanks for taking the questions. I think this question is for Glenn. Glenn, you got a bunch of different acute situations happening right now with FX and wages going up and raw materials and freight. It's clear you're going to carry a lot of those extra costs throughout this year, but do you think we can start to see we're starting to see an easing of some of those things right now.

Speaker 9

We You start to see somewhat of a snapback in the first half of next year in earnings or just given your inventory levels and cost structure, Is it something that's likely going to persist into the first half of next year and maybe get better or more like second half of next year on the earnings side?

Speaker 3

Okay, Matt. Without giving 2023 guidance, What I will say is the spot buy and the chip situation and the electronic component situation, we are seeing some easing of that. And we are seeing examples of where we are going to our regular suppliers and they are supplying us these components Based on our negotiated contract pricing, so we're not necessarily having the only spot markets for everything. That being said, Some of these other costs that are really driven by inflations and they're commodity oriented for Metals for plastics, for transportation, some of those I think are going to linger for a while for sure. And I would expect to see those bleed into next year, certainly the first half of next year.

Speaker 3

But I am hopeful that the spot by kind of Premium things that we have experienced pretty severely in this quarter and in Q1, We'll actually start to obey.

Speaker 9

Got it. That's very helpful. And then the instruments and endoscopy numbers were really I would just love to hear about durability of that. Those products are not the most sexy products, I guess, for lack of a better term, I guess across med tech. So just talk about the durability there.

Speaker 9

And then Kevin, I think you said last quarter that neurovascular had some competitive pressures in Is that still the case today? Thank you.

Speaker 1

Yes. First of all, I actually think instruments in Endoscopy are pretty sexy businesses. But really, this is really about having terrific products. Our power tools are market leading. Our flight helmets are market leading.

Speaker 1

Procedures are picking up. And if procedures pick up, every time you do an orthopedic procedure, you're using our flight helmet, you're using our if you're using cement, you're using our cement mixers, You're using our power tools in the general surgery area, you're using our cameras and they go through the autoclave and then they break down and then they've got to be replaced. And so we have the obviously the leading imaging system. And so and our Sports Medicine business has just been on fire, right? It's growing Strong double digits.

Speaker 1

And our ASC Offense, we had a fabulous second quarter in ASC. We have a couple of new shoulder products Our in space balloon as well as our AlphaVent peak anchors. And so we have a lot of strength Across those two businesses and they always have been kind of consistent growers for Stryker if you go back over the last 15 years. And so they're going to continue their momentum. They have a really great engine of R and D and new products and both power tools and cameras have new launch Coming up next year.

Speaker 1

So I think it's absolutely they're absolutely durable. And what was the second part, sorry? NV. Oh, NV. Yes.

Speaker 1

So, neurovascular, look, the market's been a bit soft in the U. S. Just keep in mind, the U. S. Is certainly smaller in NV.

Speaker 1

They actually have more of their sales outside of the United States. It's a little different The rest of the Stryker portfolio, but the market's been a bit softer. And on the aspiration side, there have been a lot of competitive entrants In the United States, a lot of new aspiration products, which when the new products are launched, it does take surgeon attention. They want to try them out. And so there's a bit of a factor there that has touched that business.

Speaker 1

But overall, still feel very good about the neurovascular business. It's still going to we're still treating just a small fraction of the patients that need to be served. And over time, we're sure that that business will pick up, not just outside the U. S, but also inside the U. S.

Operator

Thank you. The next question is from the line of Joanne Wuest with Citi. Please proceed.

Speaker 10

Good afternoon and thank you for taking the questions. I want to talk a little bit about the pricing environment, Both the headwinds that you experienced in the quarter and then, it sounds like you're going contract by contract and trying to right size some of that to reflect inflation?

Speaker 3

Yes, I think, hi, Joanne. In terms of Q2, we did experience some of the pricing difficulties that you felt in the Pricing number, the 1.4% negative that we disclosed. I will say that that's pretty consistent with the range that we feel in normal years. I do think that, we have a very big focus with our sales teams on pricing and with our customers. And we actually saw positive pricing performance related to our U.

Speaker 3

S. MedSurg and Neurotechnology business, which is a good indicator that we are starting to enter these conversations with our customers. Our customers are doing their diligence. They understand that Just like with their staffing, with their nursing, that prices are going up and that's impacting us too. And so, we are having the conversations.

Speaker 3

Although given the contracting nature of some of our businesses, it just takes time for some of these things to stick. And so I do think that we are beginning to really lay the groundwork to really impact pricing over the future Well into next year. And so I'm confident that we're laying the processes in place now to make sure that We work with our customers to implement price increases.

Speaker 1

Yes. And keep in mind, Joanne, like some of the contracts have rebate clauses. And so you see those rebates do show up in our price number and that's a bit of a lag effect, right? So they earn the rebate and then the rebate flows through. So that's another part of this timing issue where it will take time for this to show up even as we negotiate higher prices for our products.

Speaker 10

I appreciate that clarification. As a second question, are some of the pipeline products maybe even for next year, including other

Speaker 2

Joanne, can you repeat that for us?

Speaker 1

Sorry, we had a little trouble here.

Speaker 10

Sure. No Problem. The question has to do with your pipeline products and the timing of other applications for robots for applications such as spine and or shoulder applications.

Speaker 2

Yes, Joanne, it's Jason. So at this point, we don't have anything Further to announce, obviously, as we get closer to launch timing, we'll do that, but nothing further at this point.

Speaker 1

Yes. The one thing I'd tell you is the Spine team is pretty excited about it. But just separate from Mako, Joanne, I would say the Spine team is pretty excited about Q guidance, We received approval, okay, it's not a full robotic solution, but it is a pretty exciting offering within enabling technologies. We now have the spinal application approved and the cranial application is sitting with the FDA, but that should give them a bit of a lift in the second half.

Operator

Thank you. Our next question is from Joshua Jennings with Cowen. Please proceed.

Speaker 8

Hi, good afternoon. Thanks a lot for taking the questions. Kevin, I was hoping to just ask about staffing shortages and impact on the implant business. I think we they kind of felt that they may have peaked during the Omicron surge and absenteeism contributed to The staffing shortage pressuring elective procedure volumes, but do you feel, I know it's probably hard to quantify that, the inventories have improved gradually over the last few months Or are we has it kind of stalled? And are you expecting within your updated organic revenue guidance That staffing shortages will improve.

Speaker 8

It sounded like one of your previous answers that that wasn't the case, but just wanted to clarify that.

Speaker 1

Yes. Certainly, we saw choppiness in the Q2. That's kind of the word I would use. And it could be related to staffing challenges, just hiring staff and having consistent staff Actually know the procedure, so you can do the same number of procedures that you used to do in a day, and COVID, which affected frankly some of the nurses as well as patients So that type of choppiness is actually still lingering right now as we speak. But we've seen a nice uptick in procedural volumes and we do expect that uptick to gradually improve.

Speaker 1

We're not calling it Calling for a giant spike, but we are calling for this kind of environment to continue and see gradual improvement from where we were in the second quarter through the rest of the year.

Speaker 8

Understood. Thank you. And maybe just a follow-up on just the spine business and I know there was some scoliosis softness. It sounds like that Glenn called out. Is there anything To highlight just with the market recovery in spine relative to other ortho procedure categories or do you think The 2Q performance was more Stryker specific.

Speaker 8

Thanks for taking the questions guys.

Speaker 2

Yes, it's Jason. I don't think at this point there's anything more to I mean, obviously, we're early in the earnings cycle as well. So, tough to tell how we compare to rest of the market, but I'd say nothing else to add at this point.

Operator

Thank you. Our next question is from the line of Kyle Rose with Canaccord. Please proceed.

Speaker 11

Great. Thank you for taking the questions.

Speaker 2

Wanted to touch on

Speaker 11

the Mako dynamics. So you talked about some different ordering patterns. Just is that more indicative Maybe going into competitive accounts where you haven't been historically and they want to rent before they fully commit. And then I do have a follow-up.

Speaker 1

Yes. It's not that we're showing up anywhere differently. It's just that if your competitor offers a rental option, The customer says, do you have a rental option? And so the idea is, look, we're not going to let our prior contracting approach stop us from competing. And so we've introduced a rental option and started to promote that just to make sure that that's not one of the barriers and that let the technologies Fight head to head and let the best technology win.

Speaker 1

So it's more of a response to what has been happening in the marketplace, Not so much that we're going into different accounts. We've always been active in competitive accounts as well as active in with surgeons that use Stryker Products, we're really pretty agnostic. Whoever wants to use robotics is we want to make sure that if we show up and that they're able to Try our technologies and we believe we have the best system in the market.

Speaker 11

Great. And then historically, you've talked about Trends in the ASC market and putting together one sales team into the ASC. Maybe just touch on what trends you're seeing in the ASC And how that focused sales approach is playing out commercially? Thank you.

Speaker 1

Yes. Look, I'm really excited about our success In the ASC market, one of the ways you can gauge that is just our Sports Medicine business, which is normally involved in those deals and has been a big beneficiary Of the overall Stryker offense and also Mako. So with the Mako sales in the ASC has continued to increase. So If you look at the percentage of Makos and ASCs versus hospitals, that ratio has been gradually increasing. It increased again in the second quarter.

Speaker 1

So the ASC is a place that Stryker can really play well given that we're so deep in the orthopedic service line With capital equipment, as well as implants and disposables.

Operator

Thank you. The next question is from the line of Chris Pasquale with Nephron Research. Please proceed.

Speaker 2

Thanks for taking the questions. I wanted to ask 2 here upfront. First, If you could just go into some more detail on what's holding back Trauma, whether that's a product portfolio issue or a market issue, that'd be great. And then Kevin, you mentioned a couple of times being excited about the pipeline. I want to just highlight maybe 2 or 3 products that you guys have coming in the next 6 to 12 months that we should be paying attention to?

Speaker 1

Yes. First of all, I think there's nothing holding back our Trauma business. I would tell you that we had a massive comp from the prior year. If you go back to the prior year's Q2, we had pretty massive comp comparative. We have a great The upper extremities business, which grew double digits again and will continue to grow double digits the rest of the year.

Speaker 1

I think foot and ankle, the total ankle had another really strong quarter in the second quarter. It was a little bit soft on the sort of the forefoot procedures. And then the overall sort of underlying core trauma business, the market was a little bit softer. That happens from quarter to quarter, right? So whether it's weather, whether it's who knows what, It's not unusual, but I have zero worries about our Trauma and Extremities business.

Speaker 1

We are wildly excited about the way Wright Medical is integrated into our business. And we have a business as you've seen over the past 5 years that performs very, very well. And so there's nothing holding that business back. I'm pretty bullish On that business for the future. Was there a second part?

Speaker 6

Pipeline.

Speaker 1

Product pipeline. I think I mentioned before that we're really entering a pretty exciting period, going into next year with System 9 and next generation power tools, 17/8 camera, the next generation camera, LifePak defibrillator, which is the big, sort of the big large complex defibrillator, and then the Neptune S, which is a smaller version of Neptune that We'll get us into procedure areas that we're not currently in today, especially GI, which is a very, very high volume procedure. An amazing feature of this product The ability to be able to capture the polyp. And if you have to watch what they have to do today to find polyps Within the ways that they have to sort through, it's not very pretty. And this is a very, very elegant solution With this innovation and so something we're very excited about being able to launch.

Speaker 1

It will get us frankly into brand new markets where we don't even play today. So those are some of the launches that I'm sure I'm missing a few from some of the other divisions, but those are big launches. And as you know, when we launch those big When we have these big launches, they really do drive growth than they had historically.

Speaker 2

That's helpful. Thanks.

Operator

Thank you. Our next question is from the line of Steve Lichtman with Oppenheimer, please proceed.

Speaker 11

Thank you. Hi, guys. Glenn, on the increased headwind you're building in for inflation this year, I was wondering versus your assumptions on the 1Q call, Where the biggest deltas were? Was it the persistence of spot buying at elevated prices that maybe are going on longer? Is it higher base assumption on input and labor costs?

Speaker 11

Just wondering if one stood out or if

Speaker 2

it was just across the board?

Speaker 3

Yes. I think probably the single biggest thing was the spot buy and the premiums. I think as we entered into Q2 and exited Q1, we saw that that was happening, but who could imagine The demand that was out there relative to us competing with car companies and a whole bunch of different kind of competitors that we never really had before with those vendors. And so I would say that those premiums that we paid just so that we could make sure that we were serving our customers And could deliver them products with a single biggest thing that may be changed from guidance last time to guidance this time. I think the other though persistent thing that we're seeing is just because the supply chain has been so spotty, we are we also are just We're feeling inefficiencies in our processes and how we manage our manufacturing across the globe with Sort of inconsistencies of when we'll have raw materials available, for teams to work on.

Speaker 3

So I do say it's probably spot buys is the one big thing that really sticks out, but a lot of these little nits on inflation are also impacting us as well.

Speaker 11

Got it. And then just secondly on China, I know obviously not A big business for you and you grew emerging markets solidly in the quarter. But just wondering what you saw there specifically In the Q2 and any easing of pressures in China as we exited the quarter?

Speaker 1

Yes. Look, China was a tough quarter and I think anybody you talk to would say that just given the lockdowns and all the challenges. So we had certainly had negative growth In China in the quarter, but our other emerging markets were pretty fantastic. And that growth was able to offset The negative that we had in China, it's looking like it's starting to get better. But we didn't fare, I don't think, any better than our competitors.

Speaker 1

It was definitely a tough quarter Q2 in China. We do have some businesses that were like our neurovascular business continue to do very well in China. They were a little less impacted, just the nature of their that type of procedure. But the rest of our businesses felt the same pressure as everybody else.

Operator

Thank you. The next question is from Rich Newitter with Truist. Please proceed.

Speaker 12

Hi, thanks for taking the questions.

Speaker 2

Kevin, I was wondering if you

Speaker 12

could maybe give us a little historical perspective on the capital Spending situation, we're all looking forward and the prospect of recession is obviously there. At what point historically For your capital mix of businesses, have you seen what have you seen As a leading indicator for when replacement cycles do in fact elongate, clearly you're not seeing it yet. But is there a point at which we should be Rates for that happening?

Speaker 1

Well, I think, look, the recession would have to be pretty prolonged. We always have a delayed reaction across our portfolio, whether it's More elective procedures or whether it's capital equipment. There tends we tend to get affected much later in the cycle versus other parts of the healthcare system. So we have to be prolonged, which I think the economists for now are not really Calling for kind of a prolonged recession. The other factor is really hospital liquidity.

Speaker 1

That's a big factor. So if you go back to the financial meltdown, It wasn't just that there was a recession, right? There was a liquidity crisis. And when that happens, that's when you see you saw our medical business, the large capital business really get But we don't see a liquidity crisis today. The hospital balance sheets are actually quite strong.

Speaker 1

So that gives us Some confidence and plus look Stryker is a different company than it was. Back in the financial meltdown, large capital was a big part of our company. We've diversified dramatically In the past decade, so much so that it's less than 10% of our overall sales. So even if there was an impact, it's certainly not going to hurt us anywhere near the way It would have hurt us a decade ago.

Speaker 12

That's really helpful. And then maybe just one more on Mako, like big ticket capital. It sounds like the message was there was no real change in buying or demand for robotics reprioritization of HIP and knee Mako Robotics per se, but maybe there was just some revenue mix and some changes in And the revenue recognition. Is that right that the actual in quarter demand, not just the order book, but the in quarter demand For Mako's was pretty much unchanged and strong?

Speaker 1

Yes, it was strong. I mean, I think Jason mentioned in his prepared remarks, it was we were up 19% Versus the prior year. Now a good part of that was international, but even the U. S, we had growth versus the prior year and that's actually starting to pick up In the U. S.

Speaker 1

So demand is very strong. So you have to remember where we are in the cycle of robotics, right? We're in the early stages in the early cycle of robotic Surgery adoption. And, I think if we were in a later cycle, it might be a little bit of a different story. But because it's robotics, it's still early.

Speaker 1

There's still People who are anxious to get their hands on robots and we're now very active in all the teaching hospitals And the residents are coming out and they want a robot and they're when they go into their new facility and the facility doesn't have a robot, they put a lot of pressure On their hospital to adopt it. Now how they choose to pay for it, what type of contracting arrangements to get into, that's a whole other story. But facilities are buying their 4th and their 5th and And so they're doing that because they absolutely believe in the value of robotics. It has nothing to do with marketing. It's all about really trying to provide best value for their customers and for their patients.

Operator

Thank you. The next question is from the line of Travis Steed with Bank of America. Please proceed.

Speaker 12

Hey, Hey, thanks for taking the question. Glenn, I'd love to have a little bit more clarification on the 200 basis point margin headwind you called out. How much of that's actually coming from some of the more acute Spot buying that you mentioned versus the other inflationary things like plastics, metals and travel, is it roughly half and half or is it 70 five-twenty 5? Just any directional color would be helpful.

Speaker 3

Yes. Sure. I think as you look at sort of that basket of costs, The spot by certainly are significant, maybe approaching half of that basket of costs. I mean that being said, keep in mind that as we made those spot buy purchases, the underlying inventory goes on the balance And then it bleeds out into our P and L over the utilization period. So it's not something that goes away from us in the short term.

Speaker 3

The other basket of cost though, we do feel that inflation. We feel it in labor. We feel it in transportation. We're seeing it in commodities, and that's something that I'm not necessarily expecting will necessarily go away for us Over the longer term.

Speaker 12

No, that's really helpful as we kind of think about our models For the next year. So that's helpful. And I guess on pricing, would do

Speaker 9

you think you could see

Speaker 12

it going flattish next year? Or could it be something that goes positive? And then I don't know if you have any other quick comments on the sports medicine market and smoke evacuation that would be helpful as well. Appreciate it. Thank you.

Speaker 2

Yes, Travis, it's Jason. Just really quickly on the pricing piece and then I'll hand it over to Glenn on the Sports Med. But relative to Guiding on price, we're not going to guide on price for next year. And when we get closer to 2023 earnings season, you'll hear more, But nothing to guide there.

Speaker 1

Yes. On your question on Smokivac and Sports Medicine. First of all, Smokivac continues to be very high growth. There are 6 states that are mandating smoke free ORs. There are 7 other states that have legislation that's pending.

Speaker 1

And so you can see the momentum around smoke free operating rooms is absolutely increasing and we're in a great position and we had fantastic growth And smoke evacuation that should continue. And then on Sports Med, this is about our company, we are now becoming a fast becoming a leader in sports medicine, Which obviously wasn't the case a decade ago. First, we started off with our hip portfolio with the Pivot acquisition and some and really Becoming the leader in hip arthroscopy, we already had a decent knee offering and shoulder had been our weakness and we've really bolstered Our shoulder portfolio, so in all the key areas, we now have very compelling product opportunities. And when we're We're absolutely growing faster than the market and have been for the last couple of years. But I think the ASC shift has put an accelerator on our Sports Medicine business.

Speaker 1

And I think you know that sits within our Endoscopy division, but that business has a fabulous outlook for the future. I mentioned the in space Balloon for massive rotator cuff repair. The Alphavan product is just recently launched, which really addresses gaps that we had In the sort of smaller rotator cuff repair, part of the Sports Medicine business. So I'm extremely bullish About sports medicine, for the future.

Operator

Thank you. Our next question is from the line of Drew Ranieri With Morgan Stanley, please proceed.

Speaker 13

Hi, thanks for taking the questions. Kevin, just to go back to one of your comments about the And I think specifically it was on foot and ankle. You mentioned there was some softness on forefoot procedures. Just curious if that was the overall market or if There's anything else that you were seeing there? And then second, just on Precuity, you've talked about it being just a strong launch.

Speaker 13

Curious kind of what you're thinking in terms The durability there and are you taking competitive share or is really growth really all driven by replacements at this point?

Speaker 8

Thanks for taking the questions.

Speaker 1

Yes. Look, the orders are continuing to pile up on Precuity and it's not just in Friendly Shops. So we are clearly winning Competitive business. This is an absolutely fantastic product. The challenge we have is there are a lot of microchips used in that product.

Speaker 1

And so We've been constrained on being able to ship to meet the demand. That is going to get better in the second half and into next year. But It's a really it's a terrific product and that's going to continue to drive growth. It's kind of year 2 of the product launch. And if we weren't so Supply constrained, we'd be shipping a lot more of those products.

Speaker 1

But beds don't sort of ramp as quickly In terms of the buying cycle as a power tool or as a camera. So I would expect the next, let's call it, 2 years to be really, really strong For Percuity, what was the second? Foot and ankle. On foot and ankle, look, we'll have to see what happens when everybody else reports and kind of see what's happening in the marketplace. It was a little bit softer for us on the forefoot side, but strong on the total ankle side.

Speaker 1

And let's just we'll have to see how that plays out. I really it's a little premature for us to know kind of how we're doing. I would say we're pretty excited about we have a number of 4 foot launches. We had some supply challenges in getting those launches activated, but like the EZ Clip launch for example EasyFuse, we call it, sorry. It looks like a staple, a terrific product for procedures.

Speaker 1

But we stumbled a little bit in just because of supply chain challenges in getting These new launches for MIS 4 foot, those launches will so I just mentioned one of those is EZ Fuse, but there's about 5 of these products, Which we'll start to see the impact of those in the second half of the year. So I'm feeling optimistic going forward, but the second Quarter was a little bit choppy. Nothing that's overly concerning though.

Speaker 8

Thanks for taking the questions.

Operator

Thank you. Our next question is from Michael Matson with Needham and Company. Please proceed.

Speaker 2

Yes. Thanks for fitting me in. Just had two questions. I guess, I'll just go ahead and give them to you both We're getting both to

Speaker 11

you here. So the with the System 9 and

Speaker 2

the 1788 coming up next year, Is there any risk that we're going to see a slowdown in those businesses? I know how important those product lines are to instruments in endoscopy. And then the second question would just be around R and D. It's 7.22 percent in the first half. Looking back to my model, that's up almost 200 basis points over the past 10 years.

Speaker 2

Is this the new normal or could it keep going higher from here?

Speaker 1

Well, let me start with the product launches. When we do these new launches, we have sales forces that know how to kind of drive revenue. And these are products that do wear out and do need to be replaced. And So I'm not expecting any slowdown whatsoever. And if anything, you should see growth continue and then gradually Increase and sometimes it's not the 1st year that you see the spike, you sort of see it, but you certainly see it by the 2nd year.

Speaker 1

So To me, this is just a continuation of it will continue a very, very good trend. Look, R and D has gone up And part of it's because of the mix of our businesses. If you think about neurovascular, it's a little more thirsty because of the clinical clinicals that are required. We are launching a lot of new products. So we our spend has increased.

Speaker 1

And look, we are over 7% of sales. I think for the full year, I don't know that we'll stay over 7%, but we'll be Kind of in that neighborhood as a percentage of sales. I don't know that it goes a lot higher from here. I think that's a pretty healthy level of R and D, but look that fuels our growth And growth doesn't come for free. So you do have to invest in innovation if you want to continue to grow.

Speaker 1

But I think this is probably a good level And we'll kind of stay at this level unless our portfolio drastically changes. We are doing more in the world of digital that does cost some money. Mako, we're pursuing different applications that is a bit thirsty for R and D, but I would say that this is a pretty good level.

Speaker 2

Got it. Thank you.

Operator

Thank you. Our next question is from the line of Jeff Johnson with Baird. Please proceed.

Speaker 14

Hey, guys. Good afternoon. Maybe just a couple of clarifying questions. First on pricing. You sound pretty good on pricing going forward.

Speaker 14

Is that largely driven by the strong new product cycle coming in MedSurg and you typically can get a little price on new MedSurg products? Or do you would you expect in MedSurg to take Bigger than normal price increases on these new products. And then on the implant side, have you had any tangible conversations with hospitals yet about maybe less bad pricing Dynamics in contracts over the next couple of years or is that just still a hope at this point, but nothing tangible yet to talk about?

Speaker 1

Yes. On the first question, I want to be really clear here that whenever we do launch new products, whatever price we normally will raise the price, But you won't see that on the price line of our quarterly results. So price the way we report price is like for like. So as the System 9, if it comes in at a higher price, for the 1st year that will show up in mix and volume. It will not show up in the price line.

Speaker 1

So In the 2nd year that like for like will start to show up. So just to be clear about that, we always precuity is a good example. The precuity price is higher And our SV3 bed, but that in the 1st year of that launch, you don't see that showing up in the price line. It shows up in volume mix. So I hope I'm clear on that.

Speaker 1

But obviously, that's going to be part of our strategy. As we launch new products, we're going to be able to raise prices. As it relates to implants, Early days yet. We have had a couple of early conversations and they've gone reasonably well, but it is way too early for me to be able to give you A sign of what is going to come in the future and we'll have more to share on future calls.

Speaker 14

All right. That's helpful. And then Glenn, just one more on gross margin. Just it sounds like about 100 basis points of that headwind is on the spot by Heightened costs this year in that. If those spot prices do come down over the next 6 months, as it seems like you think they could, Is that 30 to 60 days to work that into the product and turn that over onto the P and L, so that tends to be a short cycle, though those benefits could show up quickly?

Speaker 14

And then maybe on the implant side where that is getting capitalized to the balance sheet right now, those higher costs, is there a Significantly greater headwind next year, another 100 basis points that's being capitalized under the balance sheet right now that hasn't yet come through this year. So we have to think maybe An incremental 100 basis point headwind there that could get offset by the short cycle spot buy pricing coming down next year and net net those could offset or just conceptually Maybe how do we think about those 2 moving parts?

Speaker 3

Yes. Without getting too granular about next year, The way these bleed out, it's not necessarily short term in terms of how they bleed out. We worked pretty diligently to secure the kind of supply that was available when we could get it. And so that has a longer tail in terms of when we'll feel the bleed out, into our P and L, and that would apply to either side implants or the MedSurg

Speaker 14

Okay. Thank you.

Operator

Thank you. Our next question is from the line of Shagun Singh with RBC. Please proceed.

Speaker 15

Thank you for taking the question. I'll just keep it to 1. Just on M and A, how are you thinking about the current M and A Environment, your appetite for deals at the moment given valuations, where they are, are you more or less likely to do one? And do you should we expect you to continue to focus on tuck ins versus larger deals given the recent Vocera acquisition? Thank you.

Speaker 1

Yes. Thanks for the question. Certainly, we are focused on tuck ins, not just given Vocera, but also Wright Medical. So we did Wright Medical not so long ago, And then we did Vocera. As Glenn mentioned, we paid $450,000,000 of debt down in the last quarter.

Speaker 1

So right now, given our balance Our focus is really on tuck ins. We have all of our businesses are actively pursuing these kind of tuck ins. But you should expect that that's In our near term, let's say, through at least the end of this year, our focus will be much more on the tuck ins. And obviously, valuations are down. That doesn't mean that the companies that have these lower valuations are excited to sell at these new values.

Speaker 1

I think it's going to take a little time For that to set in before, we're going to see a lot of those companies, want to sell. So I don't think that we're going to miss a window, so to speak, just because we're focused on the tuck ins. But we do need to digest the acquisitions. We do need to Fortify our balance sheet, but we will continue to pursue tuck ins.

Operator

Thank you. The last question is from the line of Ryan Zimmerman with BTIG. Please proceed.

Speaker 1

Hey, thanks for fitting me in.

Speaker 16

I'll try and be quick on my question. Number 1, just I want to ask the pricing question in a different way. And as they think about pricing the ability to take it, I mean, I know you're not going to give us what kind of pricing you're going to take, but How do you think about inflation and what persists over the next 6 months or into next year in terms of how much that you can carry through? So Inflation versus an 8% is reasonable to think you can push through a similar type price increase into next year? And then the follow-up question is just around Mako Dynamics and the shift to either a rent or a lease type model, we see with Intuitive 40% plus as of the last quarter.

Speaker 16

Is that the right level to think about for where this shakes out and settles out in terms of Mako adoption and the business model? Thanks for taking the questions.

Speaker 3

Hey, Ryan. I'll handle the pricinginflation 1 first. I do think some of the normal things that you think about relative to the inflationary environment we're in and we're Feeling will persist and will live on into next year. We see labor increases. We see increases in these commodities.

Speaker 3

I do think it will take a while before, transportation and freight settles down to a more, What I'll call normal cadence in terms of ocean freight versus air freight.

Speaker 14

And so I think that will take

Speaker 3

a while to settle out. And in fact, where we enter into conversations with our customers about sort of what our cost makeup looks like and we're very frank with them, There are no surprises to them in terms of where we're seeing real increase in the real kind of raw materials and components that go into our products. And those are the kind of discussions that customers may not want to have, but they know and they expect it's coming. And so when we lead To go after price, we lead with details and with information, so that they understand that Underneath our pricing increase, we are feeling real increases in the components, that go into our products.

Speaker 2

Hey, Ryan, it's Jason. In terms of the Mako question, I guess what I would say is in terms of the right mix, I think what's important Here is we think about the different options. We're trying to be flexible with the customer to ultimately drive the installed base To then get to continue market leading growth on the implant side, right? So that's really what's important for us and less about kind of that mix as we about finance, direct purchase, etcetera. So we're excited where we're headed with Mako, as I

Operator

Thank you. There are no additional questions waiting at this time. So I will now turn the call over to Kevin Lobo for closing remarks.

Speaker 1

Great. Well, thank you all for joining our call and thank you for all your questions. We look forward to sharing our Q3 results with you in October. Thank you.

Operator

That concludes today's call. Thank you for your participation. You may now disconnect your

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Earnings Conference Call
Stryker Q2 2022
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