Stryker Q1 2024 Earnings Call Transcript

Presentation

[Operator]

Welcome to the First Quarter 2024 Stryker Earnings Call. My name is Christine, and I'll be your operator for today's call. [Operator Instructions]

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, Chair and Chief Executive Officer. You may proceed, sir.

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

Welcome to Stryker's first quarter earnings call. Joining me today are Glenn Boehnlein, Stryker's CFO; and Jason Beach, Vice President of Finance and Investor Relations. For today's call, I will provide opening comments, followed by Jason with the trends we saw during the quarter as well as some product updates, Glenn will then provide additional details regarding our quarterly results before we open the call to Q&A. In the first quarter, we delivered organic sales growth of 10% with double-digit growth in MedSurg and Neurotechnology, and high-single-digit growth in Orthopedics and Spine, despite one less selling day and tough comparables from a year ago. This reflects our team's continued strong commercial execution.

Our results were led by very strong U.S. performance, notably in instruments, medical, endoscopy, trauma and extremities, and Mako. Internationally, growth momentum continued against strong double-digit growth organic sales comparables from the first quarter of last year. We expect this growth rate to accelerate for the remainder of the year as international remains a significant opportunity for us. We delivered quarterly adjusted EPS of $2.50, reflecting 16.8% growth compared to the first quarter of 2023, driven by our strong sales performance and margin expansion. As anticipated, we've begun to accelerate our M&A activity. We just completed the acquisition of mfPHD, a leading provider of modular stainless steel wall systems. This further enhances our communications business unit portfolio within endoscopy and helps us meet our customers' needs for turnkey operating room design and construction. At the end of the quarter, we also closed on our acquisition of SERF within our hip business. Our deal pipeline is strong, and we expect to be active over the course of the year.

With one quarter behind us, we now expect an increased full year organic sales growth of 8.5% to 9.5%, and we are increasing our adjusted EPS range to $11.85 to $12.05 a share. Coming off organic sales growth of 9.7% in 2022 and 11.5% in 2023, this guidance demonstrates the durability of our high growth and is a testament to our commercial strength and extensive pipeline of innovation across the company. Also, it reinforces our ability to meet our target of 200 basis points of operating margin expansion by 2025.

Next, I want to thank our teams for their ongoing commitment to talent and culture, which is reflected in the recognition of Stryker for the 14th year in a row as one of Fortune's 100 Best Companies to Work For. Our operating model, talent, and culture are true differentiators for us. In addition, we recently published our fourth annual comprehensive report which, captures our commitment and disclosures on corporate responsibility.

I will now turn the call over to Jason.

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

Thanks, Kevin. My comments today will focus on providing an update on the current environment, capital demand and select product highlights. Procedural volumes remained strong in the first quarter, in line with our expectations, driven by continued adoption in robotic-assisted surgery, demographics, a stable pricing environment, and healthy patient activity with surgeons. And while pockets of supply constraints remain, our supply continues to be stable overall.

Demand for our capital products remained healthy in the quarter, with continued elevated backlog across our endoscopy and medical divisions. Our Mako direct-to-patient campaign continues to perform well, which contributed to our very strong Mako growth, with record first quarter installations in both the U.S. and internationally. This will continue to drive our hips and knees businesses. In April, we performed our first cases using the Pangea plating system in our Trauma and Extremities Division and are gearing up for a full launch. Pangea is the largest launch in Trauma's history as it offers a comprehensive system that will enable larger hospital conversions.

Next, we received approval from the FDA for our new LIFEPAK 35 defibrillator and monitor. This is a flagship product within our Emergency Care business unit and was one of the catalysts for our acquisition of Physio-Control. LIFEPAK 35 is a modern platform with a touchscreen interface that brings advanced connected capabilities to improve workflow. We will launch this product at the end of Q2, and it will have a multiyear benefit to our Medical Division. Lastly, Mako Spine and CoPilot are pacing to launch in Q4 followed by the shoulder application at the end of the year. We continue to receive positive feedback from surgeons who have been exposed to these technologies.

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

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

Thanks, Jason. Today I will focus my comments on our first quarter financial results and the related drivers. Our detailed financial results have been provided in today's press release. Our organic sales growth was 10% in the quarter, compared to 13.6% in the first quarter of 2023. This quarter, we had one less selling day than 2023. The impact from pricing in the quarter was favorable by 0.7%. We continue to see a positive trend from our pricing initiatives, particularly in our MedSurg and Neurotech businesses, almost all of which again contributed positive pricing for the quarter. Foreign currency had a 0.5% unfavorable impact on sales in the quarter. In the quarter, U.S. organic sales growth was 11.3%. International organic sales growth was 6.6%, against a very strong comparable growth of over 16% in 2023. This performance included positive sales momentum across most of our international markets, particularly in the United Kingdom and Canada, and most of our emerging markets. Our adjusted EPS of $2.50 in the quarter was up 16.8% from 2023, driven by strong sales growth and operating margin expansion. Foreign currency exchange translation had an unfavorable impact of $0.05.

Now, I will provide some highlights around our quarterly segment performance. In the quarter, MedSurg in Neurotechnology had constant currency sales growth of 12% and organic sales growth of 11.6%, which included 13.5% of U.S. organic growth and 6% of international organic growth. Instruments had U.S. organic growth of 19%, with strong double-digit growth across the Orthopedic Instruments and Surgical Technologies businesses. From a product perspective, sales growth was led by almost 50% growth in smoke evacuation and strong performances in Power Tools, Steri-Shield, Waste Management, and SurgiCount. Endoscopy had U.S. organic sales growth of 11.1%, with double-digit growth in its communications and endo BU businesses. And from a product perspective, standout growth included cameras, light sources, insufflators, booms, and sports medicine implants.

Medical had U.S. organic sales growth of 16.8%, led by the solid sales performances in all three businesses. This included strong growth in stretchers, cots, Vocera, and Sage products. Neurovascular had U.S. organic sales growth of 2.9%, highlighted by solid performances in our hemorrhagic stents and guidewires. Neurocranial had U.S. organic sales growth of 7%, driven by strong performance in our CMF business. Internationally, MedSurg and Neurotechnology had organic sales growth of 6%, which included strong performances in our emerging markets. Orthopedics and spine had both constant currency and organic sales growth of 8%, which included organic growth of 8.3% in the U.S. and 7.4% internationally. Our U.S. Hip business grew 6.8% organically against a very strong comparable of 16.2% in the same quarter last year. This growth reflects continued strong primary hip performance fueled by our Insignia Hip Stem. Our U.S. Knee business grew 3.1% organically against another very strong comparable of 20.7% in the first quarter of 2023. Our knee growth reflects our market leading position in robotic-assisted knee procedures and the continued strength of our installed base. Our U.S. Trauma and Extremities business grew 10.3% organic, with strong performances across our upper extremities, biologics, and core trauma businesses. Our U.S. Spine business grew 3.9% organically, led by the performance in our Interventional Spine business. Our U.S. Other Ortho business grew 45.6% organically, driven by strong Mako installations in the quarter. Internationally, Orthopedics and Spine grew 7.4% organically, including strong performances in Canada and most emerging markets, particularly driven by strong Mako installations.

Now I will focus on operating highlights in the first quarter. Our adjusted gross margin of 63.6% represents approximately 50 basis points favorability against the first quarter of 2023. This improvement reflects positive pricing trends as well as continued easing of certain cost pressures that we experienced in the first quarter of 2023. Adjusted R&D spending was 6.8% of sales, which was 30 basis points higher than the first quarter of 2023. Our adjusted SG&A was 35% of sales, which was 60 basis points lower than the first quarter of 2023, due to continued discipline in our spending and investments to support our growth.

In summary, for the quarter, our adjusted operating margin was 21.9% of sales, which was approximately 80 basis points favorable to the first quarter of 2023. Adjusted other income and expense of $49 million for the quarter was $16 million lower than 2023, driven by favorability in interest rates and a higher level of invested cash, resulting in higher interest income. The first quarter of 2024 had an adjusted effective tax rate of 12.3%, reflecting the impact of our geographic mix and certain discrete tax items. For 2024, we still expect our full year effective tax rate to be in the range of 14% to 15%. Focusing on the balance sheet, we ended the first quarter with $2.4 billion of cash and marketable securities and total debt of approximately $13 billion. Our total debt includes $600 million of debt that is due to be repaid in May and has been pre-funded.

Turning to cash flow, our year-to-date cash from operations is $204 million, reflecting the results of net earnings and normal first quarter seasonal cash outflows. Considering our first quarter results, strong procedural volumes, and healthy demand for our capital products, we now expect our full year 2024 organic sales growth to be in the range of 8.5% to 9.5%, with the pricing impact to be roughly flat. If foreign exchange rates hold near current levels, we anticipate sales will be moderately unfavorable, impacted for the full year, being more negative in the first half of the year. EPS will be negatively impacted at the higher end of our previously guided range of $0.05 to $0.10. With our momentum heading into the rest of the year and our commitment to expanding operating margins, we now expect adjusted net earnings per diluted share to be in the range of $11.85 to $12.05.

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

Questions and Answers

[Operator]

[Operator Instructions] Our first question will come from Robbie Marcus with JP Morgan. Your line is now open.

[Robert Marcus, Analyst at J.P. Morgan Securities]

Oh, great. Thanks for taking the question. Congrats on a really nice quarter. A lot to ask about, but maybe two for me on financials. First, Kevin, it sounds like procedure volumes remain really healthy across the globe and capital equipment same. Would love to hear if you're seeing any changes, either up or down in the environment for capital and procedure volume growth.

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

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

[Robert Marcus, Analyst at J.P. Morgan Securities]

And maybe one, probably hasn't been asked on in a while, but your Spine business had a really nice quarter. I wanted to see is that more fundamentals and the improvements in technology you've brought to market, is that gaining some share from disruption of the competitor merger, and is that giving you a foothold ahead of the spine Mako launch and discussions in how hospitals are open to that? Thanks a lot.

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

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

[Operator]

Our next question comes from Lawrence Biegelsen with Wells Fargo Securities. Your line is now open.

[Lawrence Biegelsen, Analyst at Wells Fargo Securities]

Good afternoon. Thanks for taking the question. And congrats on a nice quarter here. One for Glenn, one for, I think, Kevin. Glenn, just maybe on the EPS raise of about $0.10 at the midpoint, can you help us bridge how much of that was operational, how much of that is coming from below the line, other income being a little lower? And obviously, FX is a greater headwind. So, just the pieces that led to the $0.10 raise. And I had one follow up, please.

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

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

[Lawrence Biegelsen, Analyst at Wells Fargo Securities]

That's helpful. And, Kevin, I'm sure you know investors are concerned about the potential impact of Da Vinci 5 on your endoscopy business. Obviously, it's not having any impact right now. Really strong growth here. I'd love to hear from you if you're willing to share what the potential exposure is and what you can do to help protect your lap tower business long term. Thank you.

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

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

[Operator]

Our next question comes from Ryan Zimmerman with BTIG. Your line is now open.

[Ryan Zimmerman, Analyst at BTIG Research]

Thanks for taking the questions and congrats on the quarter. I want to ask about the organic growth and the guidance. If you look at the 10% organic growth this quarter versus the comps and where you're guiding that 9% at the midpoint, the comps essentially do get easier through the balance of the year. And so, I'm wondering, Kevin or Glenn, if whoever wants to take this, just talk about your guidance view or philosophy for the top line, specifically given the performance and what you think could be better performance for the remainder of the year.

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

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

[Ryan Zimmerman, Analyst at BTIG Research]

Fair enough. And Kevin, your comments on M&A were pretty pointed. You've highlighted a number of areas previously. I think there were five that you specifically called out before. Are you reinforcing those same areas today? Because if I look at just some of the tuck-ins that you've done, it's actually been outside those four or five areas as of late. And so, just curious how you're thinking about the targets or the areas for M&A today.

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

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

[Operator]

Our next question comes from Joanne Wuensch with Citibank. Your line is now open.

[Joanne Wuensch, Analyst at Smith Barney Citigroup]

Thank you for taking the question and very nice quarter. Could you unpack two particular areas? One is the instrument sales of 18%, and then the other is Other up 44.2%. Both of those are real bright shining stars. I'd love to hear what went behind that. Thank you.

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

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

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

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

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

[Joanne Wuensch, Analyst at Smith Barney Citigroup]

Excellent. Thank you so much.

[Operator]

Our next question comes from Pito Chickering with Deutsche Bank. Your line is now open.

[Pito Chickering, Analyst at Deutsche Bank Aktiengesellschaft]

Hey, good afternoon. Thanks for taking my questions. Looking at the international growth, can you talk about what you're seeing in Europe versus the higher growth markets like Japan and China, and how should we think about the growth internationally, using the 6.8% seen this quarter on a constant currency basis?

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

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

[Pito Chickering, Analyst at Deutsche Bank Aktiengesellschaft]

Great. And then the second question, with strong utilization across the country for hospitals and good margins, we're seeing hospitals want to increase their capex spending. I guess, what areas of your portfolio do you think has the most upside for hospitals increasing the capex dollars?

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

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

[Operator]

Our next question comes from Shagun Singh with RBC Capital. Your line is now open.

[Shagun Singh Chadha, Analyst at RBC Capital Markets]

Great. Thank you so much, and congratulations. Kevin, you've talked extensively about the super cycle of innovation, and we are seeing strong results here in Q1. Are you able to quantify the growth contribution from new products in Q1? Perhaps talk to us about what's factored into your guidance for 2024. And I guess the key question is how should investors think about growth drivers for Stryker beyond the current super cycle of innovation? I think you've indicated year two and three are the peak years, and I think you get there in '24 and '25. So, how should we think about growth drivers beyond that? Thank you.

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

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

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

[Shagun Singh Chadha, Analyst at RBC Capital Markets]

That's really helpful. And then just a couple of follow-ups on the Ortho side, just any updates on Mako for spine and shoulder robot, are you still on track for a mid-2024 and a year-end '24 launch for both of those? Thank you.

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

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

[Operator]

Our next question comes from Vijay Kumar with Evercore. Your line is now open.

[Vijay Kumar, Analyst at Evercore ISI]

Hey, guys. Thanks for taking my question. Kevin, I had one for you on the backlog comments here, both on procedures and the capital side. On procedures, can you comment on any scheduling? I think historically, scheduling was taking time. It was elongated. Have you seen any shortening of that? Is scheduling still elongated? How have cancellations trended? I think on the capital side, you mentioned LIFEPAK. Did that contribute in the backlog, or is that something that's supposed to come in the coming quarters?

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

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

[Vijay Kumar, Analyst at Evercore ISI]

That's helpful, Kevin. And Glenn, maybe one for you. Free cash in the quarter looks like there was some timing element. Can you just remind us what kind of free cash conversion should we be expecting for fiscal '24?

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

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

[Operator]

Our next question comes from Travis Steed with Bank of America. Your line is now open.

[Travis Steed, Analyst at BofA Securities]

Hey, congrats on a good quarter. On the Mako installations, big installation number, but curious how many of those are going into competitive accounts? And is that a leading indicator for share gains in Ortho?

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

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

[Travis Steed, Analyst at BofA Securities]

Great. And then the 50% growth in smoke evacuation, was that a big step change versus where it's been running at? And I'm just curious if there was something that drove that acceleration in smoke evacuation, if it's better bundling across the portfolio or more reps pushing that product.

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

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

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

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

[Operator]

Our next question comes from Matthew O'Brien with Piper Sandler. Your line is now open.

[Matthew O'Brien, Analyst at Piper Sandler & Co]

Afternoon. Thanks for taking those questions. Just real quick, it sounds like Mako Spine is getting pushed out, I don't know, if it's three to six months. Is that about right? And then is it a software issue, hardware issue, something else you're going to incorporate into it that's causing this modest push?

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

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

[Matthew O'Brien, Analyst at Piper Sandler & Co]

Got it. And then on the MedSurg side of things, I think, Kevin, you've said double-digit growth is what you expect for the next five years there. Is that needing to have the backlog? Is there any way to quantify how significant that backlog is right now and how much of a tailwind it is versus all these new products that you've got coming like defibrillators, etc., because the Street's nowhere near double-digit growth for the MedSurg business over the next couple of years. Thanks.

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

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

[Operator]

Our next question comes from Matt Miksic with Barclays. Your line is now open.

[Matthew Miksic, Analyst at Barclays Capital]

Hey, thanks so much for taking the questions and congrats on a really strong quarter, which looks to me like, and a lot of the feedback I'm getting is, it really is just all about the comps, double-digits organic growth against low teens, low-to-mid teens organic growth last year is at least impressive to us. So, congrats on the continued momentum. And one follow-up, if I could, on the Mako robot and maybe just the nature of the launch, if you could walk us through, is that expecting a limited launch and then picking up momentum in 2025? And then, Kevin, if you could maybe talk about some of the either new aspects of that platform or some of the other products that you're excited about in the next couple of quarters that they will start coming to market and adding to growth in the back half in '25. I appreciate it.

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

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

[Matthew Miksic, Analyst at Barclays Capital]

Thanks so much.

[Operator]

Our next question comes from Danielle Antalffy with UBS. Your line is now open.

[Danielle Antalffy, Analyst at UBS Securities]

Hey, good afternoon, everyone. Thanks so much for taking the question. Congrats on a really strong start to the year. I guess, Glenn, this is probably a question for you on that 150 bps target for operating margin expansion. I know it's early. You guys just gave this about six months ago, so I'm not trying to be too greedy, but 80 bps year-over-year in Q1, it sounds like things are actually only getting better from here as it relates to the super-cycle of products, inflation presumably continues to ease, hopefully. So, I guess, just any comments you can make about that 150 bps target based on what you guys did here in Q1. And that's it for me. Thanks so much.

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

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

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

[Operator]

Our next question comes from Matt Taylor with Jefferies. Your line is now open.

[Matthew Taylor, Analyst at Jefferies & Company, Inc.]

Hello. Thanks for taking the question. I was hoping you could talk a little bit more about Pangea and LIFEPAK, two upcoming catalysts, and maybe frame any acceleration or pickup we could see from those products, how material could they be.

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

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

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

[Matthew Taylor, Analyst at Jefferies & Company, Inc.]

Great. Thanks for the color again.

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

Thank you.

[Operator]

Our next question comes from Caitlin Cronin with Canaccord. Your line is now open.

[Caitlin Cronin, Analyst at Canaccord Genuity Group]

Hi. Thanks for taking the questions and congrats on the strong performance this quarter. Just turning to upper extremity, you noted strong performance there. Any changing dynamics with the CMS ruling and ASCs hospital outpatient earlier this year? And can we also get a refresher on the new products coming in your shoulder portfolio and the timing of those?

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

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

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

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

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

Those were the big ones.

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

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

[Caitlin Cronin, Analyst at Canaccord Genuity Group]

Great. And then just a question, given it's post-close now, what strengths do you really see that bringing to your hip portfolio going forward?

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

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

[Operator]

Our next question comes from Richard Newitter with Truist. Your line is now open.

[Sam Brodovsky, Analyst at Truist Securities]

Hey, guys. Thanks for taking the question. This is actually Sam on for Rich. Appreciate the commentary you guys gave earlier on margins being stronger or expansion being stronger in the second half. But just as we think about the 80 basis points of expansion this quarter, is that reasonable to think about as a floor on a quarterly basis this year? Maybe should we think about a step back in 2Q?

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

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

[Operator]

Our next question comes from Joshua Jennings with TD Cowen. Your line is now open.

[Joshua Jennings, Analyst at TD Cowen]

Hi. Good afternoon. Thanks for taking the questions. I was hoping to just dig into the 20 bps of pricing pressure experienced by the Orthopedics and Spine units. Any chance you can help us think more or provide more details on the pricing headwind experienced by the total Joint franchise, Knees and Hips? And then at AAOS, it seemed like there was, and still with your guidance, that there's optimism that the medical device industry may be in a new era of pricing. And any updated thoughts there? And then just one follow-up.

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

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

[Joshua Jennings, Analyst at TD Cowen]

Thanks. And maybe just to follow up. I was hoping you could share your outlook on the knee and hip markets. I think at AAOS, our interpretation of some comments from your team and other orthopedic management teams was that we could see a higher level of growth in those markets relative to the pre-pandemic era. Just wanted to follow up. Any updated thoughts there? And also, there's been concerns about just the utilization headwind after a strong second half last year, broadly in the medical devices industry. And any thoughts on whether we should be thinking about a slowdown in utilization or procedure volumes in Orthopedics in the second half here this year? Thanks for taking the questions.

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

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

[Operator]

Our final question comes from Andrew Ranieri with Morgan Stanley. Your line is now open.

[Andrew Ranieri, Analyst at Morgan Stanley & Co. LLC]

Hi, thanks for taking the questions. Kevin, just two for you. Would you mind just talking about the trends you're seeing internationally in Mako? Any plans for geographic expansion in 2024? And really like what utilization levels you're seeing with the Mako system outside the U.S.? And then second, just with the Gauss surgical product, you touched on that. But can you also give us any more color on where you think you can take the product next within your MedSurg portfolio? Thanks for taking the questions.

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

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

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

[Operator]

There are no further questions. I will now turn the call over to Kevin Lobo for closing remarks.

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

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

Participants

Corporate Executives

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

Analysts

• Robert Marcus, J.P. Morgan Securities
• Lawrence Biegelsen, Wells Fargo Securities
• Ryan Zimmerman, BTIG Research
• Joanne Wuensch, Smith Barney Citigroup
• Pito Chickering, Deutsche Bank Aktiengesellschaft
• Shagun Singh Chadha, RBC Capital Markets
• Vijay Kumar, Evercore ISI
• Travis Steed, BofA Securities
• Matthew O'Brien, Piper Sandler & Co
• Matthew Miksic, Barclays Capital
• Danielle Antalffy, UBS Securities
• Matthew Taylor, Jefferies & Company, Inc.
• Caitlin Cronin, Canaccord Genuity Group Inc.
• Sam Brodovsky, Truist Securities
• Joshua Jennings, TD Cowen
• Andrew Ranieri, Morgan Stanley & Co. LLC