© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to the First Quarter 2018 Stryker Earnings Call. My name is Brian, 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.
Before we begin, I would like to remind you that the discussions during this conference call will include the forward-looking statements. Factors that could cause actual results to differ materially are discussed in the company's most recent filings with the SEC.
Also, the discussions will include certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release that is an exhibit to Stryker's current report on Form 8-K filed today with the SEC.
I will now turn the call over to Mr. Kevin Lobo, Chairman and Chief Executive Officer. You may proceed, sir.
Welcome to Stryker's first quarter earnings call. Joining me today are Glenn Boehnlein, Stryker's CFO, and Katherine Owen, Vice President, Strategy and Investor Relations. For today's call, I'll provide opening comments, followed by Katherine, with an update on Mako. Glenn will then provide additional details regarding our quarterly results before we open the call to Q&A.
Our Q1 performance exceeded our expectations and positions us well for another strong year in 2018. Organic sales growth was an impressive 7% despite one less selling day in the quarter versus 2017 and was well balanced across businesses and geographies. There were a number of standout performances in the quarter as we innovate through internal investments, effectively running our sales and marketing offense and execute on sales and acquisitions.
Neurotechnology and Spine led the way, delivering 10% increase in organic sales, powered by Neurovascular growth of 20%, reflecting strength in both hemorrhagic and ischemic stroke. MedSurg had strong organic growth of roughly 8% as Endoscopy continued to post strong double-digit growth in its core business and also had good performance from NOVADAQ.
We are pleased with the speed of integration since we closed last November, and our unified sales force is driving share gains across the portfolio. Entellus, which closed in March, is also off to a strong start and is reported within Neurotechnology. The early success of these deals underscores the benefit of prioritizing M&A, which has become a core strength for Stryker in both identifying attractive targets and executing post closing.
Turning to Ortho, sales were up nearly 5% organically, led once again by strong growth in trauma and knees. And Mako had another strong quarter with a significant increase in new robot installations year-over-year.
Geographically, we had strong performances in Japan, South Pacific and Canada while Europe was a bit softer than the recent trends owing to the bed blockages in the UK. And emerging markets had a solid quarter, posting double-digit growth. The robots top line coupled with the benefits tied to our cost transformation for growth, which we call CTG, drove a meaningful year-over-year increase in our adjusted operating margin to 25%.
As Glenn will discuss in more detail, the previously announced adoption of certain accounting guidance changes had some benefit to our operating margin. But after adjusting for this impact, our adjusted operating margin expanded 50 basis points year-over-year despite acquisition dilution in 2018. I'd like to take a moment to thank Lonny Carpenter and his team for their efforts in driving CTG, which is now beginning to translate into improved operating margin performance.
As many of you know, after 30 stellar years at Stryker, Lonny recently announced his plans to retire. Lonny has made too many contributions to Stryker over three decades to attempt to cover them here, but his commitment to driving CTG and its sustainable impact on our margins is certainly one of the thumbprints he will leave on our company.
Turning back to the P&L. With a strong top line, we continue to support investments in sales, marketing and R&D that will help deliver sales growth at the high end of med tech. Our operating margin expansion coupled with the benefits from foreign currency and tax resulted in adjusted per share earnings increase of 13.5% to $1.68, above the high end of our targeted range.
Based on our Q1 outperformance and the outlook for the remainder of the year, we have raised our expectations for both full year organic sales growth and adjusted EPS. We're also well positioned to deliver a minimum of 30 basis points to 50 basis points of operating margin expansion.
With that, I will now turn the call over to Katherine.
Thanks, Kevin. My comments today will focus on Mako. In the first quarter, we installed a total of 28 robots globally with 24 in the U.S. compared to a total of 18 in the year-ago quarter, of which 11 were in the U.S. Upgrade to robots in the field for the total knee application continued, reaching approximately 70% by the end of Q1. We remain on track to have the vast majority of the robots in the U.S. upgraded by Q3. Of the robots installed in Q1, over 50% were in competitive accounts with Stryker either had no knee market share or our share is well below our average level.
During the quarter, we trained 160 surgeons approximately on Total Knee, bringing the total number of surgeons trained since launch to roughly 1,000. Looking at U.S. procedures, in Q1, Mako Total Knee procedures approximated 8,200, which compares to roughly 1,100 in the first quarter of 2017 and also up sequentially from roughly 7,150 in Q4 with all Mako procedures topping 15,200, Total Knee represents the majority at roughly 55%.
Utilization rates increased roughly 80% year-over-year with the robot in nearly 400 hospitals in the U.S. Of the roughly 4,000 hospitals in the U.S. with orthopedic practices, we estimate long-term roughly 50% are candidates for at least one robot, suggesting considerable runway for continued adoption.
We remain focused on our strategy of selling new robots, upgrading customers and collecting clinical data. We believe we are particularly well positioned in robotics for orthopedics, given our considerable head start, established implant and capital sales forces, expertise in blade and navigation technologies to our Instruments division and ongoing investments in R&D towards new application and next-generation technologies.
With that, I'll now turn the call over to Glenn.
Thanks, Katherine. Today, I'll focus my commented on our first quarter financial results and the related performance drivers. We have provided our detailed financial results in today's press release. Our organic sales growth was 7% in the quarter. As a reminder, this quarter included one less selling day, which had an approximately 1% negative impact on growth. Keep in mind that selling days generally do not have an impact on the performance of our capital businesses.
Pricing in the quarter was unfavorable 1.6% from the prior year, while foreign currency had a favorable 2.5% impact on sales. U.S. and international organic sales growth at 7% continues to demonstrate strong momentum, and both geographies were impacted from one less selling day.
In the U.S., there were strong performances across Orthopaedics, MedSurg and Neurotechnology. International sales growth demonstrated solid gains in Japan, Canada, Australia and emerging markets. Our adjusted quarterly EPS of $1.68 increased 13.5% from the prior year, reflecting strong drop-through on sales growth combined with good operating expense performance. In line with our previous expectations, our first quarter EPS was favorably impacted approximately $0.02 by foreign currency exchange rates, including translational and transactional impacts.
Now, I will provide some highlights around our segment performance. Orthopaedics delivered constant currency and organic growth of 4.7%, including organic growth of 5.8% in the U.S. This performance was highlighted by strong performances in knees of 5.5%, and Trauma & Extremities of 9%. The primary drivers of performance in the quarter included continued demand for our Mako TKA knee platform, 3D-printed products in our foot and ankle portfolio. Internationally, Orthopaedics delivered organic growth of 2.5%, which reflects softer performance in Europe.
MedSurg continued to have solid performances across all businesses in the quarter with constant-currency growth of 9.1% and organic gains of 7.8%, which included a 7.6% increase in the U.S. Instruments had U.S. organic sales growth of 4.7%. This included the negative impact of supplies issues related to our Puerto Rico facility ramp-up. These supply issues should moderate in the second quarter and did not affect Instruments' Power Tools business, which had double-digit growth during the quarter, led by the strength of its System 8 and Micro Power product lines.
Endoscopy delivered U.S. organic sales growth of 16%. This reflects strong demand for its video platform, general surgery, rooms and lights and sports medicine products. The Medical division had U.S. organic growth of 4.8%, driven by strong performance of its core bed and power cot products as well as its physio business. Medical Sage business continues to recover from last year's product issues and is back in market with a complete product portfolio. We expect Sage to return to growth in the third quarter.
Internationally, MedSurg had organic sales growth of 8.8%, which reflects strong sales in Japan, Australia and Canada. Neurotechnology and Spine had constant-currency growth of 13.5% and organic growth of 10.1%. This growth reflects continued demand for our Neurotech products, offset by softness in our core Spine business. Our U.S. Neurotech business posted organic growth of 14.7% for the quarter, highlighted by continued strong demand for our coil, ischemic stroke, CMS and our powered instruments and accessories for neuro, spine and ENT.
Our Spine business in the U.S. continued to see market softness as well as low-double digit price declines across core product lines, with the exception of our Tritanium implant products. Internationally, Neurotechnology and Spine had organic growth of 14.2%. This performance was driven by continued strong demand across most geography for our Neurotech products.
Now, I will focus on operating highlights in the first quarter. As noted in the press release for Q4, the adoption of ASC-606 primarily had the impact of reclassifying certain costs from SG&A to sales. As such, all the following references to basis point improvements are net of this impact to enable an apples-to-apples comparison. Our adjusted gross margin of 66.3% improved nominally from the prior year quarter. Compared to the prior year first quarter, gross margin was favorably impacted by productivity, efficiency and foreign exchange gains, offset by business mix and price.
Our adjusted SG&A was 35% of sales, which was 25 basis points favorable to the prior year quarter. This improvement reflects the continued focus on operating expense improvements through our cost transformation for growth, or CTG program, offset by negative impact from acquisitions and continued planned investments in our CTG program, our ERP project and certain selling investments in our Mako business. R&D spending increased $12 million and was 6.3% of sales.
In summary, our adjusted operating margin was 25% of sales, which was 50 basis points favorable to the prior year quarter, which was inclusive of negative 25 basis points related to acquisitions.
Our operating margin reflects good leverage and continued operational savings, offset by key investment. We remain confident in our ability to deliver our full-year commitment of driving a minimum of 30 basis point to 50 basis point improvement in our op margin.
Now, looking at other income, expense and taxes, other expenses decreased primarily due to favorable interest income. Our first quarter adjusted effective tax rate of 16.1% reflects an underlying operating tax rate of 17.5%, primarily offset by a higher-than-expected benefit related to stock compensation expenses.
Focusing on the balance sheet, we continue to maintain a strong position with $2.5 billion of cash and marketable securities, of which approximately 55% was held outside the U.S. Total debt on the balance sheet at the end of the quarter was $7.9 billion. This increase from year-end 2017 primarily relates to a $600 million April maturity that was financed in March.
Turning to cash flow, our first quarter cash from operations was approximately $297 million. During the quarter, we completed a $300 million share repurchase, which will offset the impact of dilution in 2018.
And now I will discuss our second quarter guidance. We raised our expectation of organic annual sales growth to be in the range of 6.5% to 7% for 2018. As a reminder, Q2 has one more selling day as compared to 2017, and Q3 and Q4 have the same number of selling days. Given our first quarter performance, continued momentum and continued favorability related to foreign exchange, assuming rates stay at the current levels, we now believe that our adjusted net earnings per diluted share will be in the range of $7.18 to $7.25 for the full year. For the second quarter, we anticipate adjusted net earnings per diluted share to be in the range of $1.70 to $1.75.
This guidance, full year and quarter, includes anticipated impacts from the aforementioned business investments, the previously announced $0.04 of dilution related to Entellus, net foreign currency exchange favorability, including both translational and transactional impacts, consistent with our first quarter results and expectations at the beginning of the year.
And now, I will open up the call for Q&A.
Thank you. Our first question comes from the line of Bob Hopkins from Bank of America. Sir, your line is now open.
Hello. Thanks. Thanks for taking the question and congratulations on the strong start to the year. First question I wanted ask was just on the knee business. And this might be a little hard for you guys to tease out, given how well you're doing across the board. But it definitely looks like, when you look at J&J's numbers and Zimmer's numbers and your numbers, like the knee market slowed in the first quarter. And I was wondering if that's something that you guys kind of saw in your surgeries, or just wondering if you could offer a comment on that. And I recognize it might be little harder for you to tease out, given that you're taking share and doing so well, but just curious, if you had any thoughts on the knee market this quarter?
Yeah. Thanks, Bob. I think, overall, there was a sense that procedures were softer in the first quarter. How much of that was the flu season or other factors, it's tough to know because we have such a long history in the reconstructive market of seeing quarter-to-quarter variability. Some quarters coming in stronger than expected for no explicable reason, and some quarters like this that are a bit softer. We're not seeing anything that suggests underlying demand has changed in some fundamental way. I think this is just one of those quarters where maybe there was a bigger seasonality impact.
Our focus really is, though, on market share gains. It's by far the biggest driver of our performance. And when we look at the history here, 2016, we grew 400 basis points ahead of the market in the U.S. in knees. Last year, we grew 600 basis points. And on the first quarter, it looks like we're growing at least 600 basis points faster than the market. So that's really our focus here than quarter-to-quarter variability, because again we're not seeing anything in the market or hearing anything from our customers or our sales force that suggests underlying demand or trend in the recon market is changed.
Okay. So, I guess, just as a follow-up to that, and just to make sure, there's nothing on pricing as it relates to knees. I just wanted to follow up on that. And then I guess, the other question I had was just for Kevin, more broadly, when you look at the state of your business and the really strong growth you guys have been putting up as an organization, maybe you could just comment from a big picture perspective on sort of the durability of the growth outlook for the business on the top line? Just some broad thoughts for the rest of 2018 on sort of durability of growth.
Sure. Thanks, Bob. I'd tell you first on the pricing, there was really no change on our hip and knee business. Very consistent with what we've seen over the past couple of years, the same underlying trend.
And as it relates to our sales growth, I think the durability is reflected, and this is our 20th consecutive quarter where we've grown organic sales over 5%. So, we're growing sales on top of strong growth from the prior years, year after year after year. So that, I would say, is something we've been demonstrating very consistently. The fact that we're raising our full year guidance to 6.5% to 7% after one quarter, normally we kind of wait for the second quarter before we raise guidance, but it came in so strong and really it so well balanced across our different businesses and regions that it gives me a lot of confidence that we can continue to perform at the high-end of medtech.
And our next question comes from the line of David Lewis from Morgan Stanley. Your line is now open.
Good afternoon. Two quick questions for me. The first – first of all, congrats on another 8% underlying growth quarter, guys. But margins, Kevin, the real standout this quarter. So, just given the dilution with Entellus, how should we think about the 30 basis points to 50 basis points of guidance for the remainder of the year? And just more broadly, where do you think the company is now on this margin journey you've been discussing now the last six or eight quarters?
(00:19:11) answer this. Go ahead, Glenn.
Yeah. David, we continually reiterate our 30 basis points to 50 basis points and our confidence relative to that. And I think this quarter we're starting to see some of the CTG efforts that we put in place to really turn positive. And so, that's been a good bright spot.
We've also sort of instilled the mindset within our organization and incentive plans and things like that, that drive a focus on operating margin. I think – if you look at some of our other programs, our indirect spend management has turned positive. Plant network optimization has turned positive. And we've also completed our sort of our geographic market rationalizations. So, that's an expense that we won't have.
I think, on the flip side of that, we are going to continue to see investment in ERP greater this year than we saw last year. And we'll also continue to invest in our product lifecycle management program at a higher level than we had invested last year. So I think, given that acquisitions were about a 25 basis points drag on our op margin, I think delivering the 50 basis points, I feel good about, and it gives me confidence going into the rest of the year.
And as I said in the opening comments, I would expect a minimum of 30 basis points to 50 basis points. So, I think that's the first time we've used the word minimum. And that's really on the strength of a strong first quarter and strong underlying performance and expectations for the rest of the year.
Okay. It's actually the second time, Kevin. The first time is the minimum 9%. Can't forget that.
The floor.
That's the floor. Second question for me is just, we actually (20:56) with your math. We think you took 7 points a share – or grew 7 points faster than market fourth quarter, 7 points faster than market this quarter. Obviously, Mako was a driver there. So, I noticed that Mako placements reaccelerated this quarter, strongest quarter in several. I'm just wondering how much of this is just traction inflection in the market versus sort of the incremental transition away from upgrades to de novo system placements? Thanks so much.
Yeah. I think a couple of factors. It's the same sales force that's doing installs and that is doing upgrades. So, it's always a balance in any given quarter. And based on our customer needs, and where there might be in the Q, those numbers move back and forth as we had more upgrade focused in the fourth quarter. And we're also seeing continued inroads into competitive accounts. It's gone from 40% to now over 50% of the robots are going into competitive accounts. So I think it's clear we're seeing continued strong momentum and a lot of runway given the number of hospitals that don't yet have a robot.
And our next question comes from the line of Chris Pasquale from Guggenheim. Your line is now open.
Yeah. Thanks. First is a clarification, Glenn. From the schedules in the release, it looks like operating margin improved about 70 basis points, and you're talking about 50 basis points. So, what's the additional adjustment that you're making there?
Yeah. The adjustment relates to ASC 606 rev recognition guidance. And if you think about the FASB announced those changes which impacts sort of the timing of revenue recognition, but it also provided some more clarity regarding the presentation of certain costs. So, in 2018, we reclassified certain costs from selling up into sales. And if you think about looking at 2017, that adjustment would have been about $28 million per quarter reclassified from selling up into sales. And so, by taking account of that adjustment, that's how you get your 50 basis points.
That's helpful. Thanks. And then, can you just talk a little bit more, guys, about the strength in Endoscopy this quarter. You highlighted a number of things across that portfolio, but that was a particularly strong performance. Was there anything in particular there that drove that upside?
It's really across the board strength in the entire Endo portfolio. Clearly, the 1588 camera has been a tremendous success, but it's – as Glenn commented, it is booms and lights, it's sports medicine, that whole Endo business is just seeing really, really good momentum, and very excited too about the NOVADAQ acquisition. That integration has gone faster than we anticipated, and it's certainly setting them up for continued momentum there now that we've got a combined sales force in place.
And our next question comes from the line of Isaac Ro from Goldman Sachs. Your line is now open.
Good afternoon, guys. Kevin, just wondering if you could maybe opine a little bit on the seasonality of Orthopaedics procedures. Not only have a few data points, it seems like there was a little bit of a first quarter seasonality and there's a lot of noise in the quarter this year with flu and all that. But just would appreciate your current view as we think about seasonality, not just this year, but heading into the end of this year and into the next year. Do you think this effect across the industry could pick up?
I'll go back to what Katherine said in one of the previous questions and just say we see quarter to quarter variations. If you look at sort of rolling four quarters, we don't see anything that's suggesting some fundamental shift in the market. So, I think let's see how the second and third quarter play out, but this is not unusual. We had a pretty strong fourth quarter, a little bit softer first quarter. We've seen that movie multiple times over the past five years. So, I still see the market as very stable from a procedural standpoint and we're really much more focused on driving our growth through share gains.
Understood. And then on the margin side, obviously, that's something that I think a lot of people have been looking for and it's good to see the improvement. Are there any one-timers there that you would say are – that were especially helpful this quarter that maybe don't repeat sequentially as you think about the summer months here? Thank you.
Yeah. There really aren't any onetime benefit items that are flowing through. I mean, really the onetime items are really related to sort of acquisitions, which is a negative. The other things I mentioned, especially those things that are related to sort of our CTG program and ERP, and direct spending and indirect spending, those are all things that should be recurring as the year goes forward.
Our next question comes from the line of Bruce Nudell from SunTrust. Your line is now open.
Good afternoon and thanks for taking the question. Kevin, it sounds like Mako is about 10% of the hospitals. Can you hear me?
We can. Yeah.
Oh, great. And Zimmer is going to be coming out with a robot. Smith & Nephew has another robot, of course. How are you thinking about kind of the blocking action of just getting as much insulation as you can, as quickly as you can? Because it would seem that once a robot system is installed, you don't want to have to learn on a second one.
Sure. Obviously, we have a big head start, and what we want is all our robots to be very productive. So, the idea is just going in and placing a bunch of robots is really not our strategy. We look for surgeons that are really champions that they're going to use the robot. They're going to have a robots program. So, we're not doing bulk sales, we're not doing C-Suite sales, we're making sure that every robot is very productive.
The interest level is extremely high and we do plan to take advantage of our head start, but our focus is really making sure we get value for the robots. And Katherine talked about the kind of price points that we're getting for the sales of the robots, but we really want productive robots, and if you have a robot that's collecting dust, that's of no good to anybody.
So, right now, that's what our main focus is on, that's why we give you the procedure count every single quarter, so you can see that we're ramping up procedures on the robot. But we do plan to take advantage of our head start, and we're really less concerned about what other competitive offerings there are and more concerned about making sure that we drive value with our offering.
And my follow-up is, I was looking at our model today and one of the things about Sage that struck me is how U.S.-centric it is. Could you opine upon the ex-U.S. opportunity of that seemingly very interesting set of products?
Sure. They were very, very heavily U.S.-focused, and we've now started to go direct. Certainly, we see Europe as a good market for that. Australia will also be a very good market. It just takes a bit of time, because we're choosing not to go with the distribution route, which Sage had done outside the United States. So, it's taken us a little bit of time to clean up the prior distributor arrangements and we do have a plan to go direct.
But certainly, the value proposition is compelling and we do see significant runway, and that was one of the features of that acquisition was making sure that we take advantage of the OUS opportunities. Obviously, we dealt quite a blow last year from a regulatory standpoint and we had to get these products back on the market. So, the U.S. maintained our total attention as we got the products back on the market, but we certainly see significant runway outside the United States.
And our next question comes from the line of Vijay Kumar from Evercore. Your line is now open.
Hey, guys. Thanks for taking my question. So, maybe one on guidance to start with, it looks like the EPS range was raised by $0.08, and just given the strength in Q1 and it looks like FX was another incremental $0.08 better versus the last guide. I was just trying to understand – am I missing something or why wasn't the EPS guidance maybe better?
Yeah. First of all, the guidance on FX is pretty much in line with where our expectations were in our fourth quarter call. So, that's in line with what we thought would be. I would tell you that as far as it relates to effective tax rate, we are still maintaining our guidance of 16.5% to 17.5%. So, the benefit we saw in Q1 is really probably sort of a timing benefit we think to the overall rate. And as I think about sort of our Q1 performance and sort of where the additional EPS came from, probably 75% of it came from stronger top line and op margin expansion. And I think the full year guidance reflects sort of that Q1 performance as well as sort of our expectations for a stronger top line and continued op margin expansion. Keep in mind that even at the low end of our guidance, our new guidance range, we're still forecasting double-digit EPS growth. So, I think we're in a good spot at the end of the first quarter here.
That's helpful. And just maybe one clarification on margins. If I had to – I think the Street models didn't have the 606 reduction, right? So, if I had to do an apples-to-apples comparison on the margins, I'm getting to gross margin of 65.7% and op margins of 24.8%. Does that sound right to you guys?
No. You know what, you probably should follow up with IR after the call and they'll help you with those numbers.
And our next question comes from the line of Larry Biegelsen from Wells Fargo. Your line is now open.
Good afternoon and thanks for taking the questions. So, the Neurovascular growth of 20% was quite impressive. I guess my question is, how much of a benefit are we seeing from the new guidelines, which expand the treatment window for ischemic stroke? And what was that number? I don't know if you've given that number in the past. How did that compare to Q4, and just Kevin, the sustainability of that growth? And I have one follow-up.
Yeah. We really are seeing very strong growth in both the hemorrhagic and the ischemic markets. It's coiled, it's the ischemic expansion, there's no doubt that the new guidelines absolutely help, because there's clearly a longer window now to treat patients. It's difficult to tease that actual impact out, but what we have historically seen is when this positive clinical data comes out, it certainly helps the market. We don't break it out, but I can tell you growth was very robust in both hemorrhagic and ischemic.
Yeah. And as it relates to the second part of your question, for Neurotechnology, we have three businesses within there. So, we have our craniomaxillofacial business, the neurovascular, which is the biggest, and then we have the NSE business, which is the powered instruments as well as accessories from our instruments division.
All three of those have been strong double-digit performers. Neurovascular was a strong double-digit performer all of last year. 20% is a little bit of a high watermark. And whether that can continue to be at 20%, we'll see over the next few quarters, but it will continue to be strong double-digit growth as it has been for the past few years.
That's helpful. And then for my follow-up on Physio-Control. What was the year-over-year growth there? And are you guys seeing any benefit from the Philips consent decree? Thanks for taking the questions.
So, since the middle of last year, we've had very strong growth in Physio-Control. Part of that might be owing to the Philips issues, but we've also made some management changes and we're thrilled with the leadership that we're displaying there. We had double-digit growth in the first quarter in Physio-Control. As you know, Sage had negative growth. So in spite of Sage's negative growth in the quarter, medical posted a very respectable growth performance, and Physio was one of the reasons delivering double-digit growth.
And our next question comes from the line of Joanne Wuensch from BMO Capital Markets. Your line is now open.
Hi. Good afternoon. This is actually Matt Henriksson in for Joanne. Our first question is related to the hips. Are you seeing a similar trend as what you saw with knees with still strong fundamentals but quarterly-over-quarter variability?
Yeah, I think that's very reflective of what we're seeing in the market right now.
Okay, great. And then just one follow-up with the Orthopaedics. You guys mentioned the flu season potentially having an impact in the first quarter in Europe. Is there any numbers to quantify that? Or is it just a general trend?
Yeah, I think it's just a general trend. We know there was some bed locking (34:02) in the U.K. owing to flu, but it's impossible to tease that out with any semblance of accuracy. I wouldn't say we saw some big impact in the first quarter in the U.S. Again, we just think this is one of those quarters, based on all of the data points we have, that was sequentially softer. And how much of that was seasonality or the normal quarterly variability, difficult to know, but not seeing anything that suggests a change in fundamentals.
Yeah. We've seen this before, this bed blockage (34:27) issue in the U.K. happened a couple of years ago. That's the market where we have the highest share for Stryker within Europe is in the U.K. So we definitely saw a significant impact both in our hips and knees in the U.K. But we think it's more transitory and not reflective of an underlying trend.
Our next question comes from the line of Glenn Novarro from RBC Capital Markets. Your line is now open.
Thanks, guys. Two questions on Spine. First, in your prepared remarks, you called out continued market softness, but you actually hit our numbers. You hit consensus. So, has anything really changed in the Spine market? It sounds like things haven't gotten worse, but maybe not better. So, any additional color you can give there? And then my second Spine question is, can you repeat, I think your pricing pressure that you saw, did you say down double-digits? Thanks.
Yes. I think your characterizations are correct. The market continues to be challenged. It didn't feel like it materially worsened, but it remains challenged. And the pricing declines on the core Spine down in the low double digits.
That was sort of our core pedicle screw, not the overall portfolio. So, we do have some very innovative products within our Spine portfolio such as our 3D-printed Tritanium interbody. That's not experiencing that kind of price decreases, we're just talking about on the core products. So, last year, we experienced high single digit declines. That accelerated a little bit in the first quarter. But it's a very similar Spine market, similar challenging market that we've seen, frankly, over the last five, six quarters.
Okay. Great. Thanks, guys.
And our next question comes from the line of Kristen Stewart from Deutsche Bank. Your line is now open.
Hi. Thanks for taking my question and congrats on a good quarter. I just wanted to go through, again, the increase in guidance. I'm just wondering if there's any particular division or products category that you're more excited about in terms of sustainability or growth after this quarter.
Yeah. Hi, Kristen. I really think one of the things that came across kind of sort of strongly this quarter was just the balance across geographies and across our businesses, and so I think remain pretty confident in terms of that balance will carry forward throughout the year.
I mean, there's a few exceptions. We talked about Sage, which should come back to growth in Q3, and obviously we just highlighted the softening we have in Spine. But other than that, we saw really, really good sort of balance across all the businesses.
Okay. Perfect. Thank you.
Thank you.
Our next question comes from the line of Robbie Marcus from JPMorgan. Your line is now open.
Great. Thanks. On a good quarter, congratulations. Maybe I could just start on a follow-up on the comment you just made on Spine. It sounded that it's down double-digits in pricing. That's the first I've ever heard anyone mention something that big in a price decline for Spine. So how does that compare to what you've seen recently and how do you see that trending?
Yeah. Again, we're talking about our core Spine product. So, things like our Tritanium Cage are not seeing that kind of pricing pressure, and that is not a number that's applicable to our total Spine portfolio. So our core Spine business has seen high single-digit pricing pressure. Now, it's more like 10% pricing pressure. So it is...
It's not a fundamental shift but...
...worsened marginally but it's – and that is not a new trend. It worsened slightly. But again, that's not for the entire Spine portfolio.
Okay. That's very helpful. And then, just something I want to clear up, because we've had some confusion from investors tonight is, the way I think about it, if you back out the ASC 606 and all of the non-organic stuff and you add back about a point for the one less selling day, organic growth in the quarter was around 8%, correct?
Yes.
Okay. Thanks a lot.
(38:48) press release, there is a reconciliation of the impact from the accounting change. And then you would add back that one point to get to that 8% number from the far-right table where you see the 7%.
Yeah. You add 1% for the selling day.
Our next question comes from the line of Matt O'Brien from Piper Jaffray. Sir, you line is now open.
Hi. This is Kevin Farshchi on for Matt today. Thanks for taking the questions. Wanted to follow up on an earlier question about neuro. Definitely was strong again. Just wanted to follow up on when we might see a bigger influence of that business, specifically neurovascular on the margin profile?
Yes. So just to clarify, you're asking, is it – when will it become a bigger percentage of our margin performance?
Yes, when will we – when might it be a bigger influence on sort of that improving margin story over the course of this year?
Well, I mean, if you look at the overall size of our businesses, our MedSurg business is our largest business. And so, even if neurovascular is growing at 20% and you have endoscopy and medical as Sage comes back on growing in the double-digit levels, it has some positive impact, but it's not dramatic.
When you get down to our operating margin, we don't have a huge amount of variability on our different businesses. But the variability occurs more between gross margin and op margin. So, our implant businesses including neurovascular have much higher SG&A expenses because you have sales reps standing in the operating room for every single procedure. So, yes, it does make a little bit more money at the op margin line, but it's not material. And given the smaller size relative to the $12.4 billion that we sold last year, it has some impact, but it's not dramatic in the big scheme of our overall results.
Okay. Got you. That's helpful. Thanks. And then my last one is just on trauma and extremities, just continued strength there. I was curious on two parts. One, where did you see growth concentrated? And then thinking about the rest of the year off of a strong growth profile last year, what's kind of a more sustainable growth rate for the business this year?
Great question. We've actually been asking ourselves that question for the past five years. If you look at our trauma performance, we've had double-digit growth literally for five years, almost every single quarter, and they continue to perform extremely well. We have a great product portfolio. We have extremities that are doing very well for us both foot and ankle as well as upper extremities, which we're still a fairly small player, our shoulder and our reverse shoulder and our – we have a fracture system we launched last year. They are all performing very well. So, we expect to continue to outpace the market in trauma/extremities.
And our next question comes from the line of Craig Bijou from Cantor Fitzgerald. Your line is now open.
Hi, guys. Thanks for taking the question. I wanted to follow up on the trauma and extremities business. Kevin, you highlighted foot and ankle and how well it's done recently. You guys haven't talked specifically in a little bit, I think, about the total ankle and your STAR Ankle. So I just – with several other competitors coming into the market with new ankles, so just wanted to get a sense for where you see that market, how you're positioned within that market.
I think we're well-positioned. We have an ankle that has terrific clinical data. We are developing the patient-specific guides to be able to make a procedure easy to do. It is a complex procedure. I think the market will continue to grow. But it's still in its early stages if you compare it to other total joint replacement procedures, but there's plenty of room for market expansion, and so I think it's going to be a good market for all players, including Stryker.
Okay. That's helpful. And then maybe as a follow-up, just the emerging market growth that you talked about, Kevin, in your script, it was strong. I just wanted to see if there was any color on specific regions that outperformed during the quarter.
Well, as you know, we're still fairly small in emerging markets overall. It was very broadly-based. So we had strength in Latin America. We had strength in Turkey, in Russia, in China. India was the one market that was a little bit soft, still. So we're still having challenges related to the price cuts on knees, but it was pretty broad strength across the regions. And I'm really pleased with the progress we've made and really firming up our leadership teams in these regions. And I do expect emerging markets to continue to perform well, and with the one exception being India, which I think will remain challenged through the course of this year.
Our next question comes from the line of Richard Newitter from Leerink Partners. Your line is now open.
Thank you. Katherine or Kevin, on Mako, we continue to see a shift of procedures to the outpatient setting. Your Mako placements accelerated, as someone pointed out earlier in the call. I guess could you help me understand what impact the trend towards outpatient surgery, if any, what impact this will have on Mako utilization, and how Mako fits in and the willingness to use the robot in that patient, in that care setting?
Yeah. So keep in mind, as you know, the shift is only to hospital outpatient setting, and we have sold robots into the hospital outpatient setting. How quickly procedures shift there, I think it's going to be gradual. But clearly, the Mako value proposition and certainly, as we believe the clinical data starts to come and supports the outcome, that value proposition plays out in that setting as well. I just think it's premature right now for us to guess how quickly, what percent of procedures switch to that setting, because there are – not every patient, by far, is a candidate for that setting. But we have – the vast majority of our Makos are in the hospital, but we've also sold them into the hospital outpatient setting.
Yeah. And even in the ambulatory surgery centers where right now commercial pay procedures are being done. There is an interest for Mako. The only challenge there is the capital equipment. They don't necessarily always have the same amount of capital equipment budget as a hospital, but we have very, very flexible financial solutions that we offer for that setting. So we believe we're going to be well positioned to win, not just in the hospital, but also in hospital outpatient as well as surgery centers as volume does migrate over time.
Thanks. And just on the comments on flu and the UK kind of bed halt situation, I guess now that the flu season is more or less passed, can you give any comments on what you're seeing in terms of a pickup or resumption of surgeries getting done in those affected regions? Thanks.
Let's just go back to what happened a few years ago. When we saw this in the first quarter, we did see after that temporary bed lockage, (46:24) we did see volumes come back. I would expect this year to be no different. I'm not going to comment specifically on what we're seeing right now, it's very early in the second quarter, but we would expect a normal resumption of procedural volumes just as we've seen in the past.
Our next question comes from the line of Kyle Rose from Cannacord. Your line is now open.
Great. Thank you very much for taking the questions. And just two questions. First, on Mako, you've historically talked about the halo effect that you see in the market. And then just maybe a bit more color. I mean, year two of the big commercial push, you've obviously had some great success as far as competitive conversions, but just maybe give us a little more detail on the utilization trends in, I guess, your legacy Stryker accounts that are adopting Mako versus some of the new accounts that are more competitive conversions and then just how that kind of translates to some of your broader business units.
Yeah. I don't think we're going to get into that level of detail regarding the utilization rates. I'd refer you back to the comments we made on the call, which are really the data set we're going to be providing that I think is a good picture of how we're installing, where we are with upgrades and what we are seeing with utilization rates and training surgeons and all of those data points are trending favorably.
There is no doubt that that halo effect continues because once we get into a competitive account, which is now up to north of 50% and the robot is installed, the sales reps are going to sell the entire portfolio, our 3D-printed cementless product offering, revisions, et cetera. And so that is the reason why we see significantly faster growth for our total knee portfolio in accounts where we place the Mako.
Yeah. And it's specifically been tracking as roughly four to five times more growth in accounts where we have a Mako robot installed, and that's regardless of whether it's in the United States or in Europe. So it is driving growth across the entire implant portfolio.
Okay. That's very helpful. And then, Kevin, earlier, you referenced M&A as a core strength of the company. I mean I think that's clear. But then I just wanted to see – any update as to what you're seeing in the market just from a valuation perspective as a strategic buyer and then also, kind of an update on what the appetite is for maybe tuck-in acquisitions versus something potentially larger or more strategic?
Yeah. Really there's no change in terms of what we're seeing in the market and our capital allocation strategy, which continues to prioritize M&A from the vast majority of the deals, and we've done a lot of them over the past 10 years or so, tend to be small to midsize. They tend to be the NOVADAQ type of deals that we can tuck into an existing sales and marketing infrastructure. And they really do help drive stronger organic sales growth that we've seen that consistently year in and year out.
We do have the ability, given our scale and cash flow, to make bigger bets. And we've done that when you think back to Mako or Sage and Physio and I think you should assume going forward that M&A is going to continue to be a priority in terms of our use of cash because we're committed to driving faster organic sales growth at the high end of med tech.
Our next question comes from the line of Amit Hazan from Citi. Your line is now open.
Thanks for the questions. Let me actually start with 2018 earnings guidance. So if I kind of look at what you just did in the first quarter and take the second quarter guide of maybe 12% to 14% or so, obviously, that leads to kind of a high single-digit earnings growth for the second half of the year. So just wondering if you – if there's anything you would call out about timing for EPS growth for the year?
Yeah. No, I think it will be fairly balanced throughout the rest of the year, so there's no big timing items. I mean we do see, obviously, a giant sort of uptick in fourth quarter, which we experience every year. So that would be the only thing that probably sticks out in terms of how the quarters flow.
Yeah. The other thing would be tax, stock option comp. As we saw last year, we had much bigger benefit in the first quarter, pretty decent benefit in the second; then it really does start to peter out in the third and fourth quarter. So you should see tax will look quite different with the biggest benefit by far being in the first quarter.
Okay. But high single-digit growth in the second half of the year for EPS sounds about right to you?
I think so, yeah.
And then on Mako, just – in terms of the sales model for the robot, we had a couple of hospitals, not many, so I don't know if this is right, but they tell us that they're leasing a unit from you as opposed actually buying it outright. And I'm wondering if that's something that you're doing more of and if so, if you can kind of give us a sense of units sold versus leased?
Yeah. We've long spoken about our Flex Financial group and that we offer different options for the robot. It's one of the benefits we have of having been in the capital space because Flex Financial existed long before we did Mako to give customers different options, including sales and leases. The vast majority of the robots are outright sales, but we do have some that are leased. I wouldn't point to any discernible change in that trend though.
Our next question comes from the line of Josh Jennings from Cowen. Your line is now open.
Hi. Good evening. Thanks a lot for taking the questions. I just wanted to follow up on Rich's question earlier, just about doing the (51:58) procedures trending to the outpatient setting. I want to just get your view on a couple of things. First, is that a risk to the knee and hip markets that potential (52:12) migration into the outpatient setting?
And secondarily, if it is a risk, is AdvaMed highly involved along with the American Hospital Association in terms of (52:24) Medicare on the surgical risk for these patients? And then lastly, could it be a (52:29) on the volume side? I guess, overall, how are you thinking about the potential transition impacting the market?
So it's still early days. Obviously, Medicare has made a change, and so that you can get reimbursed in the hospital outpatient. They're not currently covering surgery centers. And it's only the commercial payers that are moving some very selected procedures. I think you've also read, I am sure, in the USA Today about other procedures that were moving to surgery centers, and I think there has been a significant backlash based on some bad outcomes.
So it's really difficult to predict. I think it is a trend for the future. I think more and more procedures will move. But predicting the pace of that change is going to be tricky, especially if you have bad outcomes, that will certainly stall it. The Hospital Association for now is being very conservative about that. Within AdvaMed, we're not taking a strong stand in either direction. If the procedures migrate and they are done safely, that's fine with us.
We really just want great patient outcomes. And if they end up moving to the surgery centers, we really don't see that changing the dynamic of the demand for the procedures, and we don't think that competitively it causes a problem. There has been migration already, and has not affected our business in a negative way.
Great. And if I just could ask a follow-up on the (53:53) procedure specifically. There have been some reimbursement decisions negative or denials for preoperative CAT scans for knee cases. Has that been impactful, and is there a way to reverse that trend, or are you seeing any impact? Clearly, you're not seeing any impact with total knee results, but could it be if we're going forward and how can you reverse that? Thanks a lot.
Yeah, I would view that as very much the exception versus the rule. It has not been an impediment to us executing on Mako. So it just hasn't been a big factor.
I think our biggest opportunity long term here is demonstrating great outcomes, right? So we are collecting a lot of data. We are going to be doing a lot of publications. And if you demonstrate you can deliver a better balanced knee with less pain postoperatively and a series of other metrics, then the cost of the CAT scan is pretty de minimis in the overall value equation. So that's – our answer is going to be demonstrating the value of the technology. And that's going to be the answer to increase and continue to grow our business as well as to address any other concerns, such as the price of the CAT scan.
And our next question comes from the line of Jeff Johnson from Baird. Your line is now open.
Thank you. Good evening. Just wanted to ask a Mako follow-up question just on the sustainability of the new system acceleration we saw in the quarter. I guess Katherine, any chance calendar played a role in that? Were there hospitals that were putting budgets together for 2018 and that just came through at the turn of the calendar?
And if that was the case, I could convince myself that's a one quarter pop or I can convince myself that we're just kind of in a new era as these hospitals have had time to line the budgets up that maybe there is some sustainably of that too. So just wondering any comment there would be helpful.
Yeah. I wouldn't say we saw any type of impact from budgets. I mean this is just executing on our strategy, hiring the reps, going out there and demonstrating the value proposition. And as more and more robots get out there and more and more surgeons get exposed to it, the momentum starts to build.
So we're in roughly 10% of hospitals now. And so we're just seeing continued strong momentum. Until we finish all the upgrades, you will see, as you saw in Q4, quarter-to-quarter variability between upgrades versus installs. But as we said on the call, we have a lot of momentum and a lot of runway ahead of us for Mako.
All right. That's great. Then Glenn, just I want to make sure I understand on the ASC 606 issues. You're not restating the four quarters of 2017. Is that correct? You're saying that $28 million you would have pulled out of OpEx into revenue for each of the four quarters of 2017, if you're restating, but you're not, and that's how we kind of get to the revenue and the margin adjustments that you're kind of making for us?
Yeah, that's correct. We did not restate 2017. We adopted and modified adoption, so just 2018 has been reflected of that change, which is why I'm – given you the numbers for 2017 so you can update your models.
There are no further questions at this time. I will now turn the conference over to Mr. Kevin Lobo for any closing remarks.
Thank you all for joining our call. Our conference call for the second quarter 2018 results will be held on July 24. Thank you.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.