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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 2021 Stryker Earnings Call. My name is Christine, and I'll 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. [Operator Instructions] This conference call is being recorded for replay purposes.
Before we begin, I would like to remind you that discussions during this conference call will include forward-looking statements. Factors that could cause actual results to differ materially are also 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 Preston Wells, Vice President of Investor Relations. For today's call, I will provide opening comments followed by Preston with an update on the Wright Medical integration. Glenn will then provide additional details regarding our quarterly results before opening the call to Q&A. Despite the ongoing presence of the pandemic, we posted a strong quarter of organic sales growth of 4.7% versus Q1 2019. This was driven by outstanding international results, particularly in Asia Pacific and the benefits of our diversified business model.
Across our franchises, Mako, neurotech and medical had excellent performances, each posting strong double-digit growth versus 2019, a trend that we expect to continue for the remainder of the year in these businesses. Mako followed up a very strong Q4 with a banner Q1 performance, including an uptake in international installations. As expected elective procedures were negatively impacted to start the year, which had the largest impact on our hip and knee businesses. However, the trends improved progressively throughout the quarter with the U.S. hip and knee accelerating in March and into April where we are seeing mid single-digit growth as compared to April, 2019.
We also saw improved growth in small capital within parts of neurotech and instruments during the quarter. In addition, our order book has picked up across our capital businesses, which is a good sign of pending growth as procedure volumes return to more normal levels. These trends give us confidence in achieving our guidance of 8% to 10% full year organic sales growth compared to 2019, which is equivalent to 12% to 14% organic growth versus 2020 despite one less selling day. While the press release shows our performance versus both 2020 and 2019, we believe that 2019 is a better reference point for comparison. Our momentum has continued regarding cost management and cash flow, and while spending will increase to support future growth, it will be done in a disciplined manner. Glenn will elaborate on our raised EPS guidance shortly.
We also published our first annual comprehensive report during the quarter, which captures our environmental, social and governance strategy as well as commitments regarding our carbon footprint, diversity, equity and inclusion and supply chain transparency. We are encouraged by the progress we are making in these areas. Overall, I am pleased with a strong start to the year and the momentum that is continuing to build. And while pandemic flashpoints are still occurring, we are well positioned to deliver growth at the high end of med tech with leveraged adjusted earnings.
I will now turn the call over to Preston.
Thanks, Kevin. Our comments today will focus on the first quarter performance in our combined trauma and extremities business, an update on the ongoing integration of Wright Medical and on our most recent acquisition activity. During the quarter, our combined trauma and extremities business showed good resiliency growing 2.6% including Wright Medical compared to 2019, despite the ongoing impacts of COVID restrictions during the quarter. Our trauma business, which is less elective in nature, benefited from inclement weather in the U.S. and Europe in February.
Performance in upper extremities and foot and ankle was driven by the recovery of elective procedures throughout the quarter, along with lower than expected sales dis-synergies through the initial stages of the integration. As a result of the strong performance of our trauma and extremities business in the first quarter, we now expect the combined business to deliver a mid single-digit growth for the full year when compared to 2019. We remain encouraged with the progress and pace that the team has delivered with bringing the businesses together throughout the Wright Medical integration.
As we have mentioned previously, we utilized the lengthy period from announced to close, to build and resource the robust integration plan that we are now executing. As we move through the quarter, our teams made progress against many key integration milestones. To date the team has established three distinct business units with specialized commercial, R&D and selling organizations. We believe this dedication and focus will be a core driver of future growth across trauma, upper extremities, and foot and ankle.
In addition to establishing dedicated business units, the team made considerable progress with our U.S. sales integration, including the establishment of sales leadership, sales channel and territory alignment and identification of cross-selling priorities. Considerable progress has also been made on aligning the long-term portfolio and pipeline strategies. Our focus on the integration will remain a key priority for the remainder of 2021 as we balanced the complexity of the integration while minimizing sales disruption. Over the next few quarters, we will conclude the U.S. commercial integration, including the initiation of cross-selling. And we will kick off sales integrations across our international markets over the next several months.
Finally, our dedicated business development teams continue to identify and execute on tuck-in acquisitions. During the quarter, we completed the acquisition of TMJ Concepts, a medical device company that manufactures a patient-specific temporomandibular joint reconstruction prosthesis system. And our craniomaxillofacial business, personalized medicine plays a critical role in the acquisition of TMJ Concepts supports their business strategy and driving category leadership through innovation and purpose of restoring form, function and hope to patients. These acquisitions continue to demonstrate our focus on our strategy of driving category leadership and market leading growth.
With that I'll now turn the call over to Glenn.
Thanks, Preston. Today, I will focus my comments on our first quarter financial results and the [Technical Difficulty]. Our detailed financial results have been provided in today's press release. As a reminder, we are providing our comments in comparison to 2019 as it is more normal baseline given the variability throughout 2020. Our organic sales growth was 4.7% in the quarter. As a reminder, this quarter included the same number of selling days as Q1 2019, and one less day than 2020. Compared to 2019 pricing in the quarter was unfavorable 1.4% versus Q1 2020 pricing was 0.9% unfavorable.
Foreign currency had a favorable 1.3% impact on sales. During the quarter, the continued impact of the COVID-19 pandemic and related surgical procedure cancellation, primarily in the U.S. and Europe negatively impacted our sales. However, towards the end of the quarter, we did see improvements in sales momentum, primarily in the U.S. and our Asia-Pacific businesses. Also as noted in the fourth quarter, demand for certain capital products continued as we saw strong results in our Mako and emergency care products. For the quarter, U.S. organic sales increased by 1%, reflecting the continuing slowdown in elective procedures as a result of the pandemic, somewhat offset by strong demand for Mako, medical products and neurovascular products.
International organic sales showed strong growth of 15% impacted by positive sales momentum in China, Japan, Australia and Canada. Our adjusted quarterly EPS of $1.93 increased 2.7% from 2019 reflecting sales growth partially offset by higher interest charges resulting from the Wright acquisition, as well as an overall disciplined ramp-up in operating costs. Our first quarter EPS was positively impacted from foreign currency by $0.03.
Now I will provide some highlights around our segment performance. Orthopedics at constant currency sales growth of 17.2% and organic sales decline of 0.7%, including an organic decline of 1.7% in the U.S. this reflects a slowdown in elected procedures related to COVID-19. Other ortho grew 49% in the U.S. primarily reflecting strong demand for our Mako robotic platform, partially offset by declines in bone cement.
As noted previously, in March we began to see good sales momentum in our U.S. orthopedic businesses with all segments delivering positive organic growth as compared to till March 2019. Internationally orthopedics grew 1.5% organically, which reflects the COVID-19 related procedural slowdown and Gibson knees, especially in Europe offset by strong performances in Australia and Japan. For the quarter, our trauma and extremities business, which includes Wright Medical, delivered 2.6% growth on a comparable basis.
This includes strong performances in U.S. shoulder and U.S. trauma. In the U.S. comparable growth was 4.4%. In the quarter MedSurg had constant currency and organic sales growth of 5.3%, which included 1.6% growth in the U.S. Instruments at U.S. organic sales declined of 3% primarily impacted by continued procedural slowdown that impacted its power tool business partially offset by gains in its waste management, smoke evacuation products and services business.
As a reminder, during the first quarter of 2019 instruments had a very strong growth of approximately 18%. Endoscopy had a U.S. organic sales decline of 5.7%, reflecting a slowdown in some of the capital businesses, which was partially offset by gains in our general surgery, video and sports medicine businesses. The latter of which grew over 11% in the quarter. The medical division at U.S. organic sales growth at 13.6% reflecting double-digit performance and its emergency care and Sage businesses.
Internationally MedSurg had an organic sales growth of 19.9% reflecting strong growth across Europe, Canada, Australia, and Japan and medical endoscopy and instruments. Neurotechnology and spine had constant currency and organic growth of 12.8%. This growth reflects double-digit performances in our interventional spine, neurosurgical and ENT businesses and 27% growth in our neurovascular business. Our U.S. neurotech business posted an organic growth of 12% reflecting strong product growth in our neuro power drill, Sonopet iQ, Bipolar Forceps, bioresorbable and nasal implants.
Additionally, within our U.S. neurovascular business, we had significant growth in all product categories including hemorrhagic, flow diversion and ischemic. Internationally neurotechnology and spine had organic growth of 31.7%. This performance was driven by strong demand in China and other emerging markets.
Now I will focus on operating highlights for the first quarter. Our adjusted gross margin of 65.4% was unfavorable approximately 40 basis points from our first quarter 2019. Compared to the first quarter in 2019 gross margin was primarily impacted by price, acquisitions and business mix. Adjusted R&D spending was 6.8% of sales reflecting our continued focus on innovation. Our adjusted SG&A was 35.2% of sales, which was unfavorable to the first quarter of 2019 by 70 basis points.
In summary, for the quarter our adjusted operating margin was 23.5% of sale, which is 160 basis points decline over the first quarter of 2019. This reflects the dilutive impact of the Wright Medical acquisition combined with a disciplined ramp-up in cost to fuel future growth, as well as the two year compounding of certain costs given the comparison to 2019. We also reiterate our operating margin expansion guidance of 30 basis points to 50 basis points improvement over 2019 operating margin, excluding the impact of Wright Medical.
Related to other income and expenses compared to the first quarter in 2019, we saw a decline in investment income earned on deposits and interest expense increases related to increases in our debt outstanding for the funding of the Wright Medical acquisition. Our first quarter had an adjusted effective tax rate of 13%, given our mix of income. Given our current circumstances and the outlook for the full year, we would expect to be at the lower end of our range for the full year guidance effective tax rate of 15.5% to 16.5%.
Focusing on the balance sheet, we ended the first quarter with $2.3 billion of cash and marketable securities and total debt of $13.1 billion. During the quarter, we repaid $715 million of maturing debt. Turning to cash flow, our year-to-date cash from operations was approximately $450 million. This performance reflects the results of earnings continued good management of working capital and approximately $170 million of one-time expenditures related to the Wright Medical integration. Based on our first quarter performance and the current operating environment, we continue to expect 2021 organic net sales growth to be in the range of 8% to 10%.
We believe that the recovery ramp of elective procedures will continue to be variable based on region and geography, and will continue into the second quarter of 2021. As it relates to sales expectations for Wright Medical, we now expect comparable growth for trauma and extremities to be in the mid-single digits for the full year when compared to the combined results for 2019. If foreign currency exchange rates hold near current levels, we expect net sales in the full year will be positively impacted by approximately 1%. Net earnings per diluted share will be positively impacted by $0.05 to $0.10 in the full year, and this has included in our revised guidance range.
Based on our first quarter performance and including consideration of our improved full year Wright Medical sales impact, discipline's cost management and continued positive recovery outlook. We now expect adjusted net earnings per diluted share to be in the range of $9.05 to $9.30.
And now I will open up the call for Q&A.
[Operator Instructions] Your first question comes from line of Robbie Marcus from JPMorgan. Please proceed.
Great. Congrats on a good quarter and thanks for taking the question. So maybe first start on the outlook, Kevin, you mentioned in the release in the script that March was much better than the rest of the quarter overall with most items in ortho growing in just rowing in March. I was hoping you might give some early color or good way to had a frame second quarter here. Coming out of the fourth quarter call the street had a wide range, it didn't really update through the quarters trends developed. So I was hoping maybe you could start off with giving some thoughts on where second quarter might shake out given the trends you're seeing here exiting first quarter? Thanks.
Hi, Robbie, first thing I would say is, if we're not going to be providing quarterly guidance, but I can give you an indication of what's happening. We did indicate in my prepared remarks that U.S. knees is currently growing in the mid-single digits, and that obviously was the business areas that were most impacted by the pandemic. So that recovery is pretty notable. If you look back in January and February, where we were declining and we at the end – by the end of March, we started to pull ahead into positive territory and you can see that that's on the upswing.
Difficult to predict with the flash points around the pandemic, but you can see we feel very good about confirming the full year organic sales growth. So whether that occurs in April, May, June, July parsing it by month is obviously very difficult. The other thing that makes us very confident on the full year outlook is the order book for capital equipment, both large capital and small capital, which is both picking up. So overall we're feeling bullish, obviously growth has to accelerate to get to 8% to 10% organic when you start at 4.7% in the first quarter, but the exact pasting between Q2, Q3 and Q4 so little uncertain.
Great. That's really helpful. And maybe Glenn, it seems like a lot of the $0.10 dilution for Wright might've came in first quarter and earlier in the year. One is that true and second, any thoughts on just as we straighten our models out here, I realize you're not giving guidance but just had to think about the progression of EPS as we incorporate, Wright Medical here and some of the comments on expense management you've made earlier in the call? Appreciate it.
Yes. Robbie, if you just – if you just think about the activities that are going on related to the integration of Wright Medical, naturally we would be working on cost synergies early in the year and incurring a lot of the costs that we need to incur relative to integrating Wright Medical, as well as aligning our sales forces and all the things that Preston mentioned. A lot of that did flow through in Q1, and I think that impact was certainly reflected in our EPS.
I think moving forward as we think about it, we are optimistic about where we stand relative to sales, the synergies and how that'll play out for the remainder of the year. And so a lot – some of that positivity is certainly reflected in our EPS guidance and we fully expect that that benefit will also contribute to sort of raising the guidance like we did. And then as it relates to the cost management and how that'll play out in a year, we are encouraging divisions to ramp up some of their sending's to make sure that we are properly positioned for growth that would also include spending in innovation.
And so we are making sure that we are not doing anything to hold back product development and other innovation spending that frankly will be needed to really fuel growth even towards the end of this year or even next year. So I think we'll see growth in that spending. And then, we did learn a lot from the experience that we went through and how we work. And so there are some benefits and savings that we fully expect to realize in the full year, as it relates to primarily SG&A costs. And so it's kind of a balance of those things that really get us to a lot of the confidence we had in raising our guide.
Your next question comes from the line of Vijay Kumar from Evercore ISI. You may proceed.
Hey guys, thanks for taking my question. One, Glenn, back on the guidance questions here. Is the assumption to your back half perhaps we're looking to double-digit organic growth versus 2019? Is that a reasonable assumption, just given how we're seeing procedures come back, maybe your commentary on mid-single growth in April, it seems like back half will be double-digit, is that a reasonable assumption?
Yes, I think, Vijay, you could probably do the math as easily as I can, in terms of what it will take in the back half of the year to really get to the 8% to 10%. But yes, we do see accelerating growth and we'll see accelerating growth throughout Q2, in fact, underlying some of these assumptions is that Q2 has sort of a return to normalcy by the time we get to the end, and then we'll continue to see great growth in Q3 and Q4.
That's helpful. Kevin, one, for you on that capital trends in the quarter. I think I heard you say strong capital trends, looking at the other line item within ortho; I mean that was 45%, 50%, that's a big number. Is that – was there any catch-up from last year or what's driving any sense on how Mako placements are trending? Is there an acceleration in the end market? Thank you.
Yes. As you saw we had a terrific fourth quarter with Mako and that continued into the first quarter. So it was an absolute banner first quarter for Mako, and what we saw really was an acceleration in the international markets. The U.S. continued its tremendous positive momentum, but we saw real pickup. As you know, we proceed total new approval in some new markets at towards the end of last year. And we started to see those Mako installations happening in the first quarter. So it was really Mako around the world that was booming in the first quarter and that gives us a lot of optimism, because that's an early indicator of future implants growth.
Your next question comes from line of Pito Chickering from Deutsche Bank. You may proceed.
Good morning, guys for taking my questions. Neurovascular was very strong this quarter. Can you give us some more color on what you think your end markets grew versus market share gains? Can you give any color on some key products like the Atlas Stents or the Surpass flow diverter? And also it's been growing very, very well in China. Just curious, what's driving that growth and how sustainable do you think that is?
Hey, Pito its Preston. Just wanted to follow-up with on your neurovascular question. I mean, I'd say overall we're really pleased with the double-digit growth and I think certainly, we've seen in the past that that market has been accelerating. But I do think with some of those launches that you mentioned, we are seeing shared gains in that space as well.
So those launches that we had throughout 2020, we're really starting to capitalize as we've gotten into 2021. And so seeing good growth across a variety of those items, including flow to varying stands and our aspiration products. As it relates to China, it again same thing as we brought in technologies to those markets and been able to grow there, similar to how we've done in our other markets with neurovascular. And so we really are looking forward to a strong year in total as we think about that neurovascular business.
Just to compare, kind of just add one comment. I just think we have an really incredible leadership team of neurovascular. This is not just a one-quarter wonder. I mean, they've been putting up tremendous numbers quarter-after-quarter and as Preston said, the product cycle is really hitting beautifully across all of our categories. So this will be a very strong year.
Excellent. And as a quick follow-up question that you referenced strength at the end of the quarter for U.S. and Asia is obviously uneasy comps. Can you give us any color of what you saw in the end markets in Europe, in other key markets in March? Thanks so much.
Yes. So just in terms of some of those other markets, I mean, I think as we know, Europe was a little bit behind in terms of some of the recovery. I mean, we saw some areas like the UK that might've been a little bit out in front. But certainly as we saw the continued impact on procedural volumes from the fourth quarter, we saw similar impacts in Europe really throughout the quarter. But similar to how we saw the U.S. and some of those other areas, we did see improvements as we ended the quarter.
And so again, as Glenn mentioned, our expectation as we go into second quarter is that we're getting back to more normalized levels. Of course, there's some other markets that are out there, like in Latin America and certainly with India that will remain a little bit impacted by the coronavirus restrictions, et cetera. But as far as Europe and in U.S. and especially in Asia-Pacific, as we talk about there, we do expect those markets to get back to more normal levels.
Your next question comes from the line of Larry Biegelsen from Wells Fargo. You may proceed
Good afternoon. Thanks for taking the question. Just two big picture questions for me; one, on ASC's, Kevin, J&J said that about 15% to 20% of hip and knee procedures now being done in ASC's. What are your thoughts on this trend? How are you positioned Stryker to tap into this shift. And I guess everybody's concerned is applications for implant pricing? And I had one follow-up.
Larry, I would say that 15% to 20% might be a little high, but there's no doubt that the trend is increasing and increasing pretty rapidly. We are delighted with the ASC offense that we put together really over the last two years. We have a unique way that we go to the market for ASC, a new sales organization that we created, and we really bring the best of Stryker because we have everything they need in the ASC.
We have guns, we have lights, we have power tools, we have Neptune waste management, we have operating tables, we have hips and knees and sports medicine, and foot and ankle and shoulder [Technical Difficulty] compared to kind of historical norms. And so I think if you take all of those into account in context of that, 8% to 10%, you can get a sense of where we think hips and knees are going to be.
Your next question comes from the line of Matt Miksic from Credit Suisse. You may proceed.
Hi, thanks so much for taking the questions. I'm just wondering on the guidance and a follow-up on some of the pipeline and some of the investments you're making. So just to talk a little bit about the EPS raise a bit more, I'm curious if it's – it sounds like part of that is confidence in and returning to growth on the top line. I'm just wondering if that's the case; why not take up the top line guide slightly? As I mentioned I've one follow-up.
Yes. Thanks, Matt. Well, first of all we're just through the first quarter. And so the – there's lots of twists and turns here in the next three quarters. I would say that the fundamental thing on the guidance, a couple thing is that it boils down to a lot of the optimism that we're seeing around many of our current businesses. We're definitely not unhappy at all with our Q1 earnings performance or Q1 top line performance.
And so I do think that as we accelerated through the quarter and what we're seeing in April, we feel pretty good about our prospects for the remainder of the year. Kevin referenced our order books, which are certainly a good indicator of where future sales could land. So we just feel like there's very solid momentum on that across many, many of our businesses. We also have strong underpin of discipline costs, which is going to help EPS. And I just think that all of that combined with also the progress that we're making on, Wright Medical just gives us the confidence that we felt like we should raise our guidance, which is why we didn't.
Got it. Thank you. That's helpful. Then just, you mentioned also in the operating margin sort of puts and takes that you had sort of continued your discipline investment. And I think you said innovation and growth programs, which I think many investors appreciate. You wondering if you could maybe put a finer point on that in terms of basis points, and then also maybe more importantly talk a little bit about what the first or second most important or near-term project or program is in that stack of innovation that we might see say later in the year or for next year?
Hey, Matt, I think if you look at it in terms of investment, as we think about the quarter in particular, and even as we go forward, I think you can probably just look at the rate of the percent of sales in terms of the investment that we've made in R&D this quarter compared to previous quarters. And you'll see that it's a bit elevated over our historical norms, which is, I think what Glenn's referencing in terms of additional investments and making sure that we're being disciplined about how we spend against innovation and in our R&D platforms.
As it relates to future projects, I mean, the part of the beauty of our model is that the decentralized nature of it allows each of our business units really to focus in on those projects that are important to them as they track for growth as we go forward. And so really that, that innovation and that investment is being made across all of our businesses. And as we have items that make sense to talk about in this type of forum, we'll certainly do so in terms of new launches and key product innovations that be coming to market in the future.
Your next question comes from the line of Joanne Wuensch from Citi Bank. You may proceed.
Thank you for taking the question and good afternoon. Two questions [indiscernible] front. What are your debt goals or debt pay down goals? I'm not sure how you're measuring it, whether it is sort of the debt to EBITDA metric over a certain period of time or net debt that you're aiming towards. And then Wright Medical [indiscernible] correctly, that's integrating somewhat faster than expected. And I'd be curious what you see as sort of surprise in that integration? Thank you.
Hi, Joanne. In terms of debt pay down goals and we've been pretty clear with the rating agencies on this as well. We really look at debt to EBITDA as well as the ratio that we focus on and really bring it back down to kind of what are our historical levels 2.5 times roughly. If you think about the next couple of years, it means a pay down of $2 billion, $2 billion plus in terms of what we'll do.
We – if you think about what we paid-off in the fourth quarter and what we paid-off this quarter, we're about a billion towards that goal. We probably have an opportunity to pay down a little more debt this year that we'll take advantage of too. And so that's where we think we'll land. Once we do that, we think we'll be in a solid territory to sort of accelerate our programs around looking at sort of larger opportunities. But the organization is very focused on cash flow in reaching those debt pay down goals.
And maybe I'll take the question on, on Wright Medical. I would say we're off to a very good start. So far so very good with the Wright Medical integration its proceeding much more quickly than K2M which was our first overlap deal. And I would say I'm delighted with the products, the people and the pipeline that we've acquired with Wright Medical. And really, if I think back to all the deals we've done in recent history, maybe Nolvadex is the only other deal I would say that's kind of in the same ballpark as this one in terms of the speed of integration, the speed of decision making.
We have mixed management teams that are leading a lot of the Wright Medical leadership has come over. So key leadership roles and the momentum is terrific, and we had baked in a certain level of this synergies. And even on the cost side, I think we're making progress a little bit more quickly than we had expected. So overall delighted with very arbitrary medical and the future is very bright.
Thank you.
Your next question comes from the line of Ryan Zimmerman from BTIG. You may proceed.
Great. Thank you for taking the question. So want to ask first about the U.S. spine market and you flap now the K2M acquisition and so common in kind of your assessment of your spine franchise and your expectations for getting back to market growth in that business? And then my second question is just around you call up the Sage business and it seems like it was very strong this quarter in medical. And so is there – is there some dynamic of kind of pantry reloading on the expectation that procedures could be picking up sooner? Just how to think about that cadence within that business going forward? Thank you.
Hey, Ryan, it's Preston. I'll take both of those questions. So from a spine perspective, I think overall, we're very encouraged by the performance that we've seen in our spine business over the last several quarters. Certainly it's being enhanced by enabling technologies, certainly our recent acquisition of Mobius being a part of that. And I think the other thing I would just point out to you as we think about spine in relation to some of the other implant businesses; we certainly didn't see the same level of impact as a result of the COVID restrictions, particularly across this last quarter.
Like we saw on some of the other implant businesses, which is something to keep in mind when you think about the performance, but overall, like I said, we're encouraged by the performance and we're – with high expectations in terms of our spine business getting back to market levels and continuing to perform that way.
As it relates to this Sage, I think you hit it, I mean, really it's a product that certainly was impacted by the procedural slowdowns. And so as hospitals ramp back-up and get ready for that, the procedures to pick back-up, there's an element of Sage that we'll pick back-up in terms of stocking to get ready. But at the same time, I think it also began to see the flow through that's happening from a stage perspective, as well as, as more and more procedures are done in that catch-up of the recovery process.
Got it. Thanks for taking questions.
Its Kevin, I'd just like to add one comment. I think our medical business sometimes gets a little underestimated and the reason is you have three different components of it. You have the acute care, the bed instructors and we have a brand new bed per acuity that was launched towards the end of last year, that'll have four models, two of those models will be launched a little later this year.
That'll drive very strong growth for that business and then you have the emergency care, which is the defibrillators and the district ambulance costs, and then you have the Sage of business. And so you have three different businesses that frankly had – last year you had a little bit more contribution from acute care and emergency care and not so much from Sage. This year you're going to have a lot more Sage, emergency care is going well and acute care should pick-up as we get into the latter course of this year. So overall it really is a much more stable high-growth business than it was a decade ago, based on the acquisitions of both Physio-Control and...
Thank you for taking the question.
Your next question comes from the line of Chris Pasquale from Guggenheim. You may proceed.
Hey, thanks for taking the questions. Glenn, one quick one for you, and then one on the business unit. Just wanted to confirm with the guidance, how much of the change in EPS guidance was related to change in expectations for currency versus operational performance? It wasn't clear to me what the components were there?
Yes. Chris, we basically incurred some positivity at $0.03 in Q1, and we think the full year will have an impact of $0.05 to $0.10 just there's still some variability out there. So that's where we got it in.
I guess, relative to the original guidance. Was there a delta there, or is that the same as you were expecting with the original EPS range?
There's a really it's wordsmithing, I mean the original guidance we taught it would be $0.01, affirm $0.10 and now we're sort of more thinking that we might see a range of $0.05 to $0.10.
Your next question comes from the line of Anthony Petrone from Jeffries. You may proceed.
Hi, thank you. Just a couple of questions, one on robotics, one on Wright Medical. On robotics, just trying to get a sense of sort of the competitive landscape, we're hearing quite a bit about the J&J develops robot launch here pending, and so just wondering if there was any sort of impact in the 1Q numbers, perhaps a bigger selling effort ahead of a competitive launch.
And then secondly, on Wright, when we think about sort of settling at mid-single digit growth pre-acquisition that was a high single-digit grower. I'm just wondering if we can sort of break that out between the synergy and pandemic. And so what is the timing to get back to that high single digit growth rate? Thanks a lot.
Yes. So with regards to your question on robotics, I mean, from our perspective, really nothing's changed in our focus and what you saw in the first quarter really is just a continuation of the effort that we had since we launched Mako and so we're really seeing that the uptick as a result of just selling in our technology. And overall, we really remain bullish about Mako and what it brings. Other competitive systems like VELYS or ROSA haven't slowed us down at all. And if anything, what they've done is they've increased the validation that robotics are going to stay and really demand for Mako and our technology continues to be super strong as we saw by the results we posted. And then also, we believe we have the best solution. And so from a head-to-head comparison it's something that we look forward to with the technologies that are on the market today.
As you think about Wright Medical and again the high single digits, I mean, it's all inclusive in there. Obviously, we're coming off of a pandemic or still kind of coming out of the end of the pandemic, so there is certainly some impact there. There are dis-synergies that are associated with the deal itself. And then there is also just the integration happening in terms of the Wright business and our own business through cross-selling and things like that. So, it's not something that we've parsed out in terms of the different components of it. I think what we can expect to see is that as we work through the integration we'll get out of total trauma and extremities business back up to performing above market growth.
Yes, thanks a lot.
The key thing to remember at the middle – mid single digit growth that includes our existing trauma business. So that wasn't just for the Wright Medical portion right. That's the combined trauma and extremities. And so Wright Medical will be a faster growing component of the combined trauma and extremities business, but obviously wasn't in the first quarter just because of the pandemic.
Thank you very much.
Your next question comes from the line of Steven Lichtman from Oppenheimer. You may proceed.
Thank you. Hi, guys. First question I know you haven't been providing Mako numbers in recent quarters. I was wondering if you could give us your perspective on where U.S. market penetration is today. Any color you can provide and where you think we're at penetration wise from a procedure placement perspective – from a market perspective would be really helpful.
Yes. I mean, obviously, we're not providing specifics on the quarter, but I think if you go back and look at what we said in the fourth quarter that will give you some sense of where we are in total installation base both from a U.S. or a global perspective, and you can make some assumptions about what that might mean U.S. versus international. But if you think about what that total placement is, and you think about the fact that there is the potential for 4,500 or so hospitals that could carry a Mako that just gives you a sense of where we are penetration wise. But even then I would tell you that that many of these hospitals are able to take more than just one. So I think the bottom line with all of that is it's still early days in terms of penetration. So there is a lot of opportunity out there in terms of robotics and taking Mako and taking more than one Mako as we look forward.
Got it, great. And then Glenn, you mentioned relative to Wright, obviously integration going better and you're up – the top line is part of the operating margin confidence also some pull forward of the expense synergies that you were expecting? Or is that still yet to come as well?
Yes, I think, it's a fair assessment. We're executing very well on the cost synergies that were planned in our modeling. And so, we are going to see a little bit of that favorability that's flowing through the revised guidance.
Your next question comes from the line of [indiscernible] from Morgan Stanley. You may proceed.
Hi, thanks for taking the questions. Kevin, you called out a strong China results in the quarter. Could you just maybe talk a little bit in more detail about what you're seeing now over the next 12 months? And what your expectations are moving through 2021? And just sticking with APAC for a second, kind of what's your enthusiasm for Mako in China and Japan? Is 2021 an inflection year for these countries? Or should we see more gradual adoption in the near-term?
Yes. So, first of all, China had a terrific first quarter as you know that the pandemic is not really affecting day to day life in China. And they had a very – obviously in 2019 – even going back to 2019, we had terrific growth, but obviously last year was very badly affected in the first quarter if you compare to 2020. So China as a whole, we're very small in China relative to other companies, but we grew incredibly fast in very, very high double-digit growth in Q1. The outlook for China for us is still very positive given our lower relative market shares. It will be a very good Mako market with just getting started in China. I would say Japan – certainly Australia is farther ahead of where we are in China. So it's early days, but very promising, very encouraging.
The one negative for China, of course, is this trend towards volume-based procurement, which you've seen in the cardiac stents. And we know that that's going to come down the pipe in effect a couple of our businesses hasn't yet but starting to and there'll be noise around that. But overall China for us still remains a high priority markets and will be a growth market for us just given our relative position, but even as it relates to Mako that'll be carved out of the tendering related to volume-based procurement. So we still have that significant runway for robotics both in Japan and China. Those are going to be both big markets and then we're very excited about our progress in both of those.
Great, thank you and just a question for Glenn. Glenn, you mentioned momentum continues for cash flow. Could you just give us some more color on your efforts to drive cash flow kind of as discretionary expenses come back? Just how is Stryker focused on cash flow generation today maybe versus 12, 24 months ago? Thank you.
Yes, I think one of the things that we got the whole organization garnered around over the course of 2020 was just the importance of cash flow and good management of that cash flow just so we can operate the company at reduced revenue level levels, but then also just so we could reallocate that cash flow to areas that provide better returns in terms of M&A and things like that. So I do think organizationally we are well positioned relative to manage cash flow. We have efforts ongoing in terms of moving a lot more of our collections to standardized shared service centers. We have efforts in inventory management and working very closely with the businesses, so that we can forecast inventory needs better.
We also look at distribution strategies that sort of are more efficient in terms of how much inventory we have to have on hand to serve customers. And then lastly, we are also working with our vendors in terms of accounts payable and how do we have more favorable terms in terms of payment terms on accounts payable. And so all of that is just really tightening up our working capital, certainly will benefit us this year as we look at improving the results of cash flow.
Your next question comes from the line of Matt Taylor from UBS. You may proceed.
Hi. Thank you for taking the questions. So I wanted to ask about your guidance. Last quarter you were asked about what the swing factor was between the high and the low end. And you said that basically the big one was how quickly things come back in Q2. If they came back better on the front end, you could be near the high end and on the back end near the low end, if that makes sense. So is that still how you're thinking about it? And based on the trends that you're seeing is that leaning you towards the high or the low end of guidance for the year?
Thanks, Matt. So as we think about it again, we provided the range because of the variability that exists. And certainly, as we think about where we're headed, we're happy with what happened in the first quarter. And as we – with the momentum that we're taking into the second quarter, and certainly if we continue to have great momentum, obviously it means a good thing for us as we think about our overall sales. But we put the guidance range out there for exactly that reason, because there's still a lot of variability that's happening across the different marketplaces. So I think that's how I would think about it. And certainly as we come in to our second quarter results, we'll have another update that we'll be able to talk about that.
Okay. And then you mentioned a couple of times you've got a strong order book, which is a good sign. I was hoping you could characterize that for us a little bit better in terms of maybe the percentage of your sales that its impact directly or indirectly, could you talk about it as an indicator for the implants and just kind of the timing of that? When does that start to land and how long does it last that help us think about how that impacts the forecast?
Yeah, so, I think when we talk about our order book, generally, it's in reference because we think about our capital businesses, because those items are being placed in some cases well in advance as you think about our larger capital items or even the smaller capital items, the orders that are coming in there. So it's just the leading indicator as we look at those businesses. And so really when we talk about capital, we've talked about capital before as being about 15% or so being our small capital and about 9% or 10% being our large capital items as we think about as a percent of our total business. So I think if you think about those items, those are the ones that we're talking about when we reference our order book, it generally is impacting us 25 or so percent of our business. And again, it's just the leading indicator as we think about return – a return to procedures and also just the strength of our customers in terms of their financial positions as well.
Your next question comes from the line of Mike Matson from Needham and Company. You may proceed.
Hi. I wanted to ask one on M&A. After you did the Wright acquisition, I really haven't seen as many deals and there was a pandemic last year, so it's probably not too surprising given everything that was going on, but how do you kind of balance the need to digest the Wright deal, integrate the – that company with Stryker versus the funnel for M&A, and just put the valuations on some of these companies out there now?
Yes, no, a good question. As we talked about when we did the Wright deal, obviously it was the largest deal in our history. And so one of the things we talked about as well, we've go through the integration of Wright that we would continue to focus on M&A, but the focus that we'll have on M&A will be more of a tuck-in variety. So as we look at placing either smaller products or more technologies into our existing businesses. And so we go back to the end of the year. We had the OrthoSensor acquisition, and then we just talked about today, the TMJ Concepts acquisition.
So you'll continue to see those types of acquisitions in the near-term as we continue to go through the integration of Wright and the debt pay down that we've talked about as well. So I think that's how I would think about acquisitions for us as we think about going forward. I mean one key point is that we're always looking. We have dedicated business development teams as part of our commercial business units, and they're always out there evaluating the landscape and looking at targets, so that whenever the opportunity presents itself, we're able to take advantage of it.
Okay, thanks. And then just want to ask one on spine. So you get good growth there on the spine business. And I suspect you're probably outperforming the market, but do you have any sense for the degree to which that that market was affected by the procedural slow down in the first quarter, early part of the first quarter as opposed to the hip and knee market?
Yes. So as we think about spine, the only thing that we can look at is what's happened over the last several quarters. And I think what we see with spine, even as we look at our own business, is that it's not as impacted. I mean, it certainly is impacted as there's elective component of it, but it's generally more emergent as we think about spine versus another the hip and knee business, for example. And so, we haven't seen the same level of slowdown as we think about where that lands in regards to the total market. I think as we come through the pandemic, it's just something we're going to have to continue to evaluate and once we get into a more normalized side.
Your next question comes from the line of Richard Newitter from SVB Leerink. You may proceed.
Just for Kevin, you mentioned mid single-digit trajectory relative to 2019 for hips and knees. Those are different businesses with different deferral characteristics throughout COVID and they also have different comps in the 2019 period. So I was just curious, should we be thinking of knees as being substantially higher than that mid single digits and maybe hips dragged that down to an average of mid single digits. I'm just trying to get a sense of difference between the two categories, especially given where the backlog is coming?
Yes, so, so first of all, I don't want to get too carried away with one month of comp, right. It's a very positive sign. Both are in the mid single digit range. And I'm not going to sort of say, which is higher than the other one. They're both are doing mid single-digit growth versus April of last year. But again, you're talking about 25 days of selling days roughly between two years apart. And so, it's definitely a change from the trajectory we saw in the first three months of the year and a positive change, but I don't want to get too excited about that. It's just an indication, a data point for you that tells you things are improving, volumes are coming back, but it's not really providing you guidance with which hips and knees, which one is going to be performing better than the other one. They're both coming back and that's a good sign overall.
Okay. Thanks and then just a follow-up. You've mentioned some dynamics in spine relative to the recovery January to March. Could you talk a little bit about some of your other elective in nature procedure areas like sports medicine, maybe EMT and just talk a little bit about what the recovery is looking like there and prospects for back half thanks.
Yes, sure. Those are actually recovering very well, right. Sports medicine, I think, we have mentioned in our prepared remarks grew double-digits in the first quarter. It actually grew double-digits in the fourth quarter last year. So we're delighted that those procedures are done in surgery centers where you frankly, haven't seen the same degree of slow down as we have in the inpatient hospital. EMT was the most negatively impacted when the pandemic started because they are [indiscernible] procedures. We're seeing that have a nice rebound. And so both of those areas are going to be strong performers and strong contributors to grow in 2021.
Your next question comes from the line of from Kaila Krum from Truist Securities. You may proceed.
Great. Hi, thanks for taking our questions. So can you just speak a little bit in a little bit more detail about the TMJ Concepts acquisition you mentioned on the call, just the rationale, how important or significant that could be just any additional detail there would be helpful?
Sure. So as we think about that acquisition, and again it fits the overall strategy that we have in terms of finding products and technologies that are out there and really fitting them into our sales forces hands to help them really go out and serve the surgeons and the customers and patients that they serve. So with TMJ Concepts really it's adding that TMJ prosthesis product to the bag that's allowing us to go in and really service customers and patients that are actually in that position of needing that replacement.
But I would say overall, it's a very small deal. So this is not something that's going to really hit your radar screen for the overall size of Stryker. It's very meaningful to our CMF business, very meaningful to the oral maxillofacial surgeon, but not a big mover of the needle for overall Stryker. And so, you'll see that as we report our results. We'll report that in the acquisition column, you'll be able to see that, but it's a very small nothing that's going to be really meaningful to the overall strength.
Got it. Okay, helpful. And then just high level, Kevin, I'd love to just hear what you're hearing from your hospital customers in recent months. I mean, you mentioned you're seeing more of a shift to ASCs. Are there any other sort of interesting trends in the market you're hearing about that have surprised you either to the positive or negative and recent dialogue with your customers? Thank you.
Nothing, I wouldn't say surprising Kaila, but I would say is that the shift to the ASC, every hospital you speak to has programs underway. And so, that was already happening prior to the pandemic. It is definitely accelerating. That's probably the most notable thing I would say. The other thing is that they're actually in pretty good financial position. So unlike prior crises that we've gone through, whether it was the financial meltdown or other issues, the hospital liquidity is actually very good. And so, there was a pause for a little while on some of the capital, certainly the smaller capital, but as procedures are coming back, we're seeing that through our order book that hospitals are in actually very good financial position and better than frankly I would have expected when the pandemic first hit.
Your next question comes from the line is Jeff Johnson from Baird. You may proceed.
Thank you. Good afternoon guys. Two just clarifying questions if I could. Preston, you were talking about the spine market and good to hear that it's a little more emergent and maybe not as pressured as much in 1Q as the hip and knee market, but I'm assuming the pass-through payments on SpineJack helped a decent amount with 1Q. So when I look at you're down 2% U.S. spine versus the down 7%, 8% U.S. hip and knee. Is that about the right way to think about a six point differential in core spine versus hip and knee market growth at this point? Or would that differential be less than that if we kind of exclude some of those benefits, I'm assuming you got on the interventional side?
Yes. I mean, I think, it's again being that we're right in the middle of the pandemic, there's a lot of regional variability with this. I mean, I think any – to take any number in absolute is probably not the right bet, but I think certainly there is that gap there that –driven by that less emergent impact if you think about hips and knees versus spine. So, I mean, I think if you take some gap in that small single digit range, that's probably about right.
All right, fair enough. And Kevin, I thought it’s interesting your comments on the ASCs and the five business units typically be involved in a contract. I think historically, and correct me if I'm wrong, but historically you said there is not a lot of bundling that goes out at the hospital level, cross business units, things like that at this point, obviously in the ASCs that seems to be happening more. Does that mean your incremental share gains at ASC should be even greater than what we've seen historically on the hospital side for you guys? It just seems like you're so well positioned there given the diversification of the business model.
Yes, it's a great point. There is a very different buying that occurs at the ASC than it does in the hospital. The hospitals have very elaborate procurement divisions and departments and they buy by service line and it's very decentralized. The ASC is a very simple sort of customer that you have to interact with. They're not as many people. They can't perceive 22 Stryker sales people. They don't want to, and that's not the way they want to do business. So we have a different offense for the ASC. And fortunately we have a portfolio for the orthopedic ASC, which includes sports that is just perfect for what they're looking for.
And so, yes, we've adapted our offense. We have the portfolio, but it is a very different buying pattern. The hospital isn't as interested frankly and looking across our different divisions and hasn't historically been as interested, but the ASC customers certainly is. And the good news is we've adapted our offense. If we had continued with our – the same way we used to sell, we wouldn't be having the success that we're having now. And really I'm optimistic about this continuing in the future.
Your next question comes from the line of Matt O'Brien from Piper Sandler. You may proceed.
Hi, this is Korinne on for Matt. Thanks for taking the questions. Just one quick one for us. Can you talk a little bit about how Mako hip is going and how you expect it to perform for the remainder of the year?
Yes, sure. So the Mako hip application if you remember, we launched it last year, but we really couldn't get it out to all of our customers because of pandemic. We've got roughly 50%, maybe a little bit more than 50% of the accounts have the new software, so it's not as simple as just sort of doing an upload over the web of the software. We actually have to go to the account, put the software on and do it in servicing with our customers because there is new information they have to learn. So there's actually a training regimen that goes with it. So, right now, we're excited about the procedure growth in hip is increasing as more and more accounts have the software installed and are in serviced by our Stryker team.
This will continue through the second quarter, probably through a good part of the third quarter before all of the accounts have the new hip software, but the feedback from the surgeon customer is terrific. There's – it takes less time to register, so that speeds up the overall procedure time. And there is some very valuable information such as pelvic tilt, but surgeons find that very beneficial to make sure they're managing like length discrepancies. And so, the feedback again very positive, but we're still in the throes of this implementation and it does take time because it requires that that high touch in servicing and due to the pandemic we haven't been able to move as quickly as we would like in all of our accounts and all of our regions.
Thank you.
Your next question comes from the line of Josh Jennings from Cowen. Your line is open.
Kevin, just two questions on the knee business. First just, you've had unprecedented success with your strategy of pairing robotics with the triathlon implant. Do you see any knee now that – the other three of the big four have introduced robotic platforms to pivot from that strategy and how do you see implants evolving from here, the implants the robotics era? And then the second question is just – sorry, the ASC question, but for knees, are you overrepresented in the ASCs? That's our assumption just wanted to sanity check that do you have a higher share at ASCs than the rest of the U.S.? And you just received approval for patient specific instrumentation for the triathlon. And can you help us to understand how that improves your competitive positioning, particularly in ASCs? Thanks for taking the questions.
Okay, great. There are a few questions in there, so I'll try to cover them all. So, first of all, the ASC is an area that we welcome. We're having success with Mako, frankly, in the ASC, more success than I would have imagined, honestly, two years ago when we initially signed the deal with Conformis, that deal was designed to really have a very simple solution for the ASC customer that is not using Mako. And there will be ASCs, the deals – some of the deals we've won don't involve a Mako where they will use manual procedures. That's where this solution will be terrific because it requires much less sterilization and is really custom designed for the ASC. So, we're excited to get that FDA approval and we look forward to being able to offer that to our ASC customers. I think you asked about market share. I don't know, Preston, do you have a feel for whether we're over-indexed in ASCs? I think it's fairly representative at this point.
Yes, I think it's fairly representative at this point. I mean, obviously, it's a growing segment, but I think that are representative right now.
Yes, and it's still early, but we like our chances of being able to do very well. And as it relates to the implants, I would tell you in the short-term no real need to change anything. We're going to continue to have high – high adoption of robotics. We have cementless that continues to grow as we talked about in the fourth quarter, over 40% of our knees are cementless, but that still has a long runway to go. Longer-term I do think of different types of implants that are more bone sparing that don't use [indiscernible], but those will require IDE trials.
But it's that I think something that is able to keep the ACL in place, it is something – is an area that we're exploring more from a science standpoint. So nothing that'd be launched imminently, but I do think that will be the future is new kinds of implants that are thinner, that are occurred that only a robot will be able to – to be able to implement into a patient. So that's kind of the longer-term future, but in the near-term, let's say call it the next two, three years, I think we're very pleased with the portfolio we have and a long runway for continued growth.
Thanks a lot.
There are no further questions at this time. I will now turn the conference over to Mr. Kevin Lobo for any closing remarks.
So, thank you all for joining our call. We look forward to sharing our Q2 results with you in July. Thank you.
Thank you, ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.