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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 Second Quarter 2018 Stryker Earnings Call. My name is Gigi 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. During that time, participants will have the opportunity to ask one question and one follow-up question. [Operator Instructions] This conference call is being recorded for replay purposes.
Before we begin, I would like to remind you that the discussions during this conference call will include forward-looking statements. Factors that could cause actual results to differ materially are discussed in the Company's most recent filings with the SEC. Also, the discussions will include certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release that is an exhibit to Stryker's current report on Form 8-K filed today with the SEC.
I will now turn the call over to Mr. Kevin Lobo, Chairman and Chief Executive Officer. You may proceed, sir.
Welcome to Stryker's second quarter earnings call. Joining me today are Glenn Boehnlein, Stryker's CFO and Katherine Owen VP of Strategy and Investor Relations. For today's call I'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 momentum continued in the second quarter with organic sales growth of roughly 8% which included one extra selling day. Our results were well balanced across businesses and geographies, reflecting the strength of our diversified model. Neurotechnology and Spine led the way with global organic sales growth of 12%, driven by excellent Neurotechnology growth of 16%. We were also encouraged by Spine organic growth of over 5% despite the challenging market backdrop.
MedSurg grew 7% organically with strong instruments performance behind its latest generation power tools, while endoscopy growth slowed owing to tough year-over-year comparisons. Orthopedics organic growth of 7% was once again led by knees and trauma and extremities, Mako momentum continues with over 550 robots installed globally and with high demand we are confident regarding the outlook for continued strong robot sales.
Internationally, emerging markets grew double digits and we had strong performances in Canada, Europe and Japan. Our focus on cost transformation for growth CTG initiatives remain a key priority and is driving meaningful improvement in our operating margin, which increased roughly 50 basis points in the quarter despite acquisition -related dilution.
We continue to make meaningful investments in our product portfolio across the businesses with R&D coming in at 6.5% of sales. These investments coupled with expanding our sales and marketing teams are a key factor behind our top line growth, which remains at the high end of med tech. With a strong organic sales growth and operating margin expansion, we delivered adjusted per share earnings of $1.76, topping our targeted range of $1.70 to a $1.75 for the quarter.
Given our solid first half performance and the outlook for the remainder of the year, we now look for organic sales growth of 7% to 7.5% and adjustment per share earnings of $7.22 to $7.27 a share, despite a less positive outlook on foreign currency. Before I turn the call over to Katherine, I'd like to take a moment to thank David Floyd on his planned retirement from Stryker. David has a long and successful career in orthopedics and has been a tremendous contributor to Stryker's success since joining us nearly six years ago.
With the pending retirements for both David and Lonny Carpenter, we've adopted a new operating model and appointed Tim Scannell to President and Chief Operating Officer. We also pointed Andy Pierce and Spencer Styles to group president roles and names new presidents for instruments and endoscopy, Dillon Cardy and Brent Ladd. As you know, we have many initiatives underway through our CTG program.
With Tim as COO, we expect to drive greater efficiencies and speed of execution. Our new commercial structure will encourage greater collaboration and promote globalization across the Company. We will remain highly decentralized with sales, marketing, R&D and business development which is our proven offence. It is a credit to our focus on talent development to have so many leaders ready to take on greater responsibilities.
For me personally, I'm committed to remaining as CEO of Stryker for many years to come. I believe this structure will allow us to drive exceptional results and continue to drive high growth despite becoming a progressively larger company. As you've seen over the past five years we've consistently outpaced the market and have accelerated sales growth meaningfully, and we plan to continue this momentum through the remainder of this year and beyond.
With that, I will now turn the call over to Katherine.
Thanks, Kevin. My comments today will focus on Mako with updates on the key metrics we shared in Q1. In the second quarter, we installed a total of 39 robots globally with 29 in the U.S. compared to a total of 26 in the year ago quarter of which 20 were in the U.S. Upgrades of robots in the field to the total knee application continued and we remain on track to have the majority of robots upgraded by Q3. Over 40% of the robots sold in Q2 were in competitive accounts where Stryker either had no new market share or share well below our average level.
During the quarter roughly a 160 surgeons were trained on the total knee, bringing the total number of surgeons trained since launch to approximately 1,200. Looking at U.S. procedures in Q2, Mako Total Knee procedures approximated 10,100 bringing the year to date total to over 18,000 with all Mako procedures topping 17,500 in the quarter total knee represented the majority at over 55%. Utilization rates also continued to increase up roughly 55% year-over-year.
Overall, we are pleased with the continued adoption of the Mako robot and it's clearly enabling us to drive meaningful knee market share. We're also collecting clinical data to evaluate the myriad of outcomes with the Mako Total Knee and expect data at the upcoming major orthopedic meetings later this year and more significantly in 2019.
With that, I will now turn the call over to Glenn.
Thanks, Katherine. Today, I will focus my comments on our second quarter financial results and the related drivers. We have provided our detailed financial results in today's press release. Our organic sales growth was 7.9% in the quarter. As a reminder, this quarter included one more selling day, which had an approximately 1% positive impact on growth.
As we have said before, selling days generally do not have an impact on the performance of our capital businesses. Additionally, it is anticipated that selling days will have no meaningful impact on future quarters or full year growth. Pricing in the quarter was unfavorable 1.1% from the prior year while foreign currency had a favorable 1.1% impact on sales.
U.S. organic sales growth was 7% and international organic sales growth was 10.2, both geographies benefited from one additional selling day. In the U.S., there were some strong performances across Orthopedics, MedSurg search and Neurotechnology. International sales growth demonstrated solid gains in Europe, emerging markets, Canada and Japan.
Our adjusted quarterly EPS of $1.76 increased 15% from the prior year reflecting strong drop-through on sales growth combined with good operating expense control. Our second quarter EPS was favorably impacted by approximately $0.03 from foreign currency exchange rates including translational and transactional impacts, which was consistent with our expectations at the start of the quarter.
Now, I will provide some highlights around our segment performance. Orthopedics delivered constant currency and organic growth of 6.6% including organic growth of 5.8% in the U.S. This performance was highlighted by strong performances in knee of 8.2% and trauma and extremity of 6.8%. Some of the key drivers of performance in the quarter included strong demand for our Mako TKA Knee platform, our 3D printed products and our foot and ankle portfolio. Internationally, orthopedics delivered organic growth of 8.3% which reflects solid performances in Europe, emerging markets, Canada and Australia.
MedSurg continue to have strong growth across all its businesses in the quarter with constant currency growth of 9.2% and organic gain of 7.3% which included a 6.8% increase in the U.S. Instruments had U.S. organic sales growth 14%. This growth reflects the strength of System 8 and MicroPower product lines, offset somewhat by supply issues in Puerto Rico. Moving forward, we anticipate no material impact related to Puerto Rico supply issues.
Endoscope delivered U.S. organic sales growth of 3.8%. This reflects strong demands for its booms and lights in sports medicines products while our 1588 camera is facing tough year, year-over-year comps as well as being longer in its lifecycle. Endoscopy continues to execute on the integration of its NOVADAQ acquisition and it's on plan.
The Medical division had U.S. organic growth of 5.3% reflecting solid performance in its bed, stretcher, power cot and Physio products. As expect, Medical Sage business continues to drive its recovery and is on track to deliver strong growth for the remainder of the year albeit against softer comps.
Internationally, MedSurg had organic sales growth of 9% which reflects strong sales in Canada, emerging markets, Europe and Japan. Neurotechnology and Spine had constant currency growth of 18.5%, which includes the full quarter impact of our Entellus acquisition and organic growth of 12.4%.
This growth reflects the continued strong demand for our Neurotech products to offset by slower growth in our core spine business. Our U.S. Neurotech business posted organic growth of 15.4% for the quarter, highlighted by continued strong demand for our hemorrhagic ischemic stroke, CMS and our neuro powered instruments products.
Our Spine business continued to see market softness and mid-single digit pricing declines. Offsetting this, our IVS business and our Tritanium implant products continued their double-digit growth trends. Internationally, Neurotechnology and Spine had organic growth of 16.3%. This performance was driven by continued strong demand across most geography for our Neurotech products.
Now, I will focus on operating highlights in the second quarter. As noted in the press release and discussed in our Q1 call, the adoption of ASC 606 primarily had the impact of reclassifying certain expenses from SG&A to sales. As such, all references to basis point improvements are net of this impact. Our adjusted gross margin of 66.1% was up 10 basis points from the prior year quarter.
Compared to the prior year quarter, gross margin expansion was favorably impacted by productivity and efficiency, offset by price, foreign exchange and business mix. R&D spending was 6.5% of sales which was 10% basis points higher than the prior year quarter. Our adjusted SG&A was 33.9% of sales which was 50 basis points favorable to the prior year quarter.
This improvement reflects the continued focus on operating expense improvements through our cost transformation for growth, or CTG program, including key projects focused on indirect purchasing and shared services. This is offset by a negative impact of acquisitions and continued planned investments in our CTG program efforts like our ERP projects and certain investments in our Mako TKA platform.
In summary, our adjusted operating margin was 25% of sales which was approximately 50 basis points favorable to the prior year quarter. Our operating margin reflects good leverage and continued operational savings, offset by key investment and acquisitions, the latter which had an approximately 30 basis points negative impact in the quarter. We remain confident in our ability to deliver on our full-year commitment of driving a minimum of 30 basis points to 50 basis improvement in our operating margin.
Next, I will provide some highlights on other income and expense. Other expenses decreased from prior year quarter primarily due to favorable interest income. Our second quarter adjusted effective tax rate of 16.8% reflects an underlying operating tax rate of 17.5%, primarily offset by the benefit related to stock compensation expenses.
Focusing on the balance sheet, we continue to maintain a strong position with $1.9 billion of cash and marketable securities, of which approximately 76% was held outside the U.S. Total debt on the balance sheet was unchanged from the year-end at $7.2 billion.
Turning to cash flow, our year-to-date cash from operations was approximately $946 million. This reflects increased earnings which are somewhat offset by increases in working capital including higher tax payments as a result of tax reform and specifically required payments related to the toll tax on previously untaxed foreign profits.
And now, I will discuss our third quarter guidance. Based on our performance today and anticipated strength in the remainder of the year we now expect organic annual sales growth will be in the range of 7% to 7.5% for 2018. As a reminder, Q3, Q4 and the full number have the same number of selling days.
Given our year-to-date performance and continued momentum, we now expect that our adjusted net earnings per diluted share will be in the range of $7.22 to $7.27 for the full year. For the third quarter, we anticipate adjusted net earnings per diluted share to be in the range of $1.65 to a $1.70.
This guidance full year and quarter includes the anticipated impacts from the aforementioned business investment and the previously $0.04 dilution related to Entellus. Additionally, it includes the reduction of foreign currency translation and transaction favorability from our previous full year guidance of $0.08 favorability to approximately $0.05 favorability.
And now, I will open up the call for Q&A.
Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first call comes from the line of David Lewis from Morgan Stanley. You may proceed.
Kevin and Glenn just a couple questions on kind of back half of the year guidance, so let me start with revenue first. So guidance to us sort of implies stability into the back half of the year kind of around 7% organic. Comps are kind of stable first to second half, but maybe Kevin, can you just talk about your underlying momentum in the Orthopedic business and U.S. knees was actually better by our math. But just talk about some of the drivers into the back half of the year that kind of give you the confidence that this momentum continues? And then, I had maybe a follow-up for Glenn.
Sure David, as you've seen we've had a very stable growth platform now for well over a year. When I mean by stable is across businesses and across geographies, we're really performing very well. From quarter-to-quarter, you'll see some liability between one division and other division, but it's really the balance across our portfolio that gives us the conviction that we can continue to sustain north of 7% organic growth, and that's why we moved our first organic growth up and down. Now, we moved it up -- at the end of the first quarter, we moved it up, again, at the end of the second quarter of course based on year to date performance, but as well as the outlook. And really I don't want to single out any one business. It's really broad-based strength across our portfolio.
Okay then, Glenn, kind of similar question just on the leverage into the back half of the year. When you've done 50 basis points underlying kind of first two quarters and that's probably better than that's the top end of your range. Where do we stand in sort of the 30 to 50 basis points? As I think about the back half of the year Sage, Physio just the normal cycle of your business which indicates more leverage in the fourth quarter. Just seems like to me the second half of the year can be a stronger leverage half than the first half of the year. So why shouldn't we be thinking about sort of the upper end of 30 to 50 or better than 50 as we progress to the back half of the year?
Yes, David, I think if you think about the guidance of 30 to 50 basis points, and the fact that in Q1, we said it was a minimum. This is really a long-term financial goal. It's also an enterprise goal. So after Q1, we revived that range to be firmly a minimum of 30 to 50, which I think for us captures the potential upside that might exist in the rest of the year.
Thank you. Your next call comes from the line of Bob Hopkins from Bank of America. You may proceed.
Kevin, I wanted ask you a question about capital allocation because there's a lot that's happened during the quarter that caused investors to be interested in your thoughts on capital allocation. Obviously, you've made some leadership changes. There has been some obviously talk in the press. There has been small cap company valuation is moving all over the place. So, I guess the way I praise the question is kind of where is M&A right now on your priority list for capital? Due the management changes that you've talked about over the last couple of weeks make M&A less or to more likely? And maybe I think it'd be sort of important to kind of hear your kinds of deals that you might consider. Just remind us on kind of top priorities there?
Bob, let me start by saying that our capital allocation philosophy has not changed and it's been consistent for the entire time I've been the CEO. Our first priority is M&A. Our second is dividend, which grow roughly in line with earnings. And third is share buybacks. So, there has been absolutely no change in that. As it relates to the management changes, we become a much bigger company. And as you become bigger, you look for opportunity to refine your organization. We had two retirements, one, Lonny Carpenter, a long-standing executive; and then David Lloyd, who's been six years as a Head of orthopedic.
So, this gave me an opportunity to revisit our structure and really to provide greater potential for a lot of our leaders, as we become larger. The CEO and COO model works very well. We did a lot of benchmarking and I spoke to many other CEOs of other companies about how that model works. And Tim Scannell, I think I have an outstanding COO that really knows the Stryker culture and will be a terrific partner for me. But it also gives a lot of opportunities to other leaders who have really demonstrated greater performance over time.
So, I wouldn't read anything more into that at this stage of our development as a company. And in my tenure as the CEO, this is sort of a nice logical move really based triggered by the retirements.
Yes, and Bob just to address the latter part of your question. There is no change either in terms of how we're thinking about M&A. If you look back, historically, the vast majority of our deals tend to be small to mid size. We have a decentralized BD model that we're not going to change that has dedicated BD folks. In the division it's that closeness to the customer, we think helped us identify those targets. And so, that's a proven offence, it helped accelerate our organic sales growth and that's the offence we're going to continue with.
Thank you. Your next call comes from the line of Rick Wise from Stifel. You may proceed.
Let me start off with Mako. Every quarter, Kevin, you and Katherine highlight that Mako system shifts towards accounts where Stryker has today subpar or has had little or no Stryker market share. Maybe from approaching it from a different angle, what's going out on with these accounts in subsequent quarters? Is Mako rapidly tipping the scale where you're now closer to your average knee share in this accounts? Does it take more time from that? How do we think it's actually about share capture progress post Mako versus the existing Stryker customers adopting? Where are we in all that?
Thanks Rick. Maybe I'll just grab that one. What we do see is once we get into these accounts where we haven't had any business over fighting well below our way, it gives us the opportunity to then and sale the full portfolio of products whether it's our 3D printed cement with implants or our broader reconstructive offering
And what we see in accounts where we have a robot in the U.S. that total knee revenue in those accounts is growing about five times faster than the core funding accounting that doesn't have a robot, which make sense because we have and into account where we were really selling a meaningful amount.
And so, that's the biggest benefit as we continue to grow that base. It's in the U.S. it's over 460 robots but there is still tremendous runway given that there are literally thousands of hospitals with orthopedic practices that we think our candidates so we see a lot of runway ahead of us with that.
And when we enter into a competitive account, Rich, just add a little color, often times, it's with one surgeon champion. And it does take time for other surgeons within that facility to express an interest. And so, it's one of those curves that's maybe kind of log rhythmic, so it starts off quite slowly and then it accelerates as you have more surgeon at the account expressing an interest in adopting.
So, I would still say we're in the early stages. Obviously, this is the third consecutive quarter where we feel a very good about our growth versus the market, obviously not at once that are reported yet, but we feel very encouraged by the progress, not just in the sales of the robot, but actually the adoption of procedures, but again, it's still early in our cycle.
And just a quick follow-up, you've highlighted Kevin another solid quarter of power tool growth. How far along, are we in the System 8 rollout which I think could be a big part of that? How sustainable is that growth? Is it multi-quarter, multi-year? How do we think about it?
Yes, we're still in the early stages. We've really just a few quarters into the full commercial launch. We tend to have pretty good longevity multiyear and so you should expect to see a very good momentum for the instruments group powered by that powered instruments portfolio. So early stages of what it's historically been a multiyear run rate and it's clearly being well received based on the type of growth that was put enough.
Thank you. Your next call comes from the line of Robbie Marcus from JP Morgan.
There were a couple of line items that stood out particularly in Neurotech and Spine, Spine being an area that's underperformed in recent quarters. Maybe you could speak to some of the trends you're seeing in Spine in the overall health of the Spine market? And then what's driving the strength in Neurotech particularly any new products that you have in that department?
Yes, so I don’t think we've seen a meaningful improvement in the Spine market. Pricing did improve in the quarter as we referenced on the call, but it's still a challenging market. So we're encouraged, but I wouldn't want to say no for the core Spine business. Our IVS business is doing very well. But for that core Spine business that market remains challenged. Neuro is doing tremendous and as across the Neurotech portfolio.
We're very strong growth in hemorrhagic ischemic as well as the CMS and IVS as I've referenced. Part of it is the product offering and part of it it's a benefit we're seeing from continued market expansion and the ischemic. We did get PNA approval without having to go to a panel for our flow-diverting stent. That was a long journey, but thrilled to be able to enter the U.S. market. But it will take some time there to build up inventory, but it does help us further around that portfolio.
Thank you. Your next call comes from the line of Chris Pasquale from Guggenheim. You may proceed.
One on the MedSurg, and one on Mako for Katherine. First, on the Endoscopy, growth dipped a little bit there this quarter on an organic basis. Last quarter, it was actually a big source of upside. So, it's been a little volatile lately. You spend a minute and what you're seeing there? And then for Katherine on Mako, I think last quarter you had said that you had upgrade about 70% of the installed base. Just give us an update on where that number sits today? And what we should expect to see as you complete that process? Can you drive enough new system placements to offset that upgrade revenue?
So, I'll start with endoscopy. If you look back over the last two years, it's been a tremendous grower for Stryker. So, it's not just one quarter or the last two quarters if you go back quite a ways, it's been a really strong performer, really since the launch of the 1588 camera. This quarter obviously dipped a little bit but it's nothing that concerns us. The sports medicine and the communications business units continue to grow very well in the double-digit range. And from quarter-to-quarter, you can have a little bit of volatility related to capital. We also had a very strong prior year quarter.
NOVADAQ will start to roll into organic sales in the month of September. So it's just a little bit of an impact in the third quarter and you'll see that going forward. So, we feel very good about the leadership we have in our Endoscopy business and that we continue to see very strong growth going forward, albeit one slightly slower quarter this quarter, but it's been a very, very positive business and will continue to be going forward.
And so, we remain on track with the goal we stated before which is have the vast majority, which is probably something north of 80% of all the robots upgraded to the total knee application. Some are a bit older robots or dedicated to doing knee procedures that won't get upgraded, but we're on track to have that largely completed in the third quarter. And if you look at the business in this quarter the robots sales at 39 was very high.
Year-over-year, we had fewer upgrades than the prior year quarter which you'll see captured in that other ortho line and that's because we're that much further into addressing the pipeline. Those tend to go much quicker in terms of a sales cycle versus a robot sale.
Again, we think there is probably 4,000 or so robot or orthopedic practices in the U.S. that are the bulk of which are candidates for robots. So, we're pleased that we're approaching 500 robots sold in the U.S. and obviously more broadly. But that's a lot of runway still left for us to continue to drive robot sales, and we expect that to continue with that group.
Thank you. Your next call comes from the line of Vijay Kumar from Evercore ISI. You may proceed.
I had two questions one maybe a high level, Kevin. I think you touched upon this on your M&A strategy. You guys have been extremely thoughtful, but if you have a pretty well honed out strategy. But would you sort of be opportunistic if the opportunity should arise on the M&A front?
So, again, there's no change to our M&A strategy. We're going to focus on those adjacent and core markets. We think that really enables us to leverage our sales and marketing infrastructure. We've done deals where we've been talking to the target for the years. We've been involved with auctions. That happens in an M&A world, but there is no plan to change our strategy as relates to M&A.
And one quick question on the guidance. Glenn, on the second half, just given the first half strength, back half of last year you guys had both the hurricane and the CHF recall. Just curious why the second half wouldn't be stronger given some of those easier comps?
I think if you think about sort of with the midpoint of the year, we've already raised guidance twice. I'm sure there can always be a scenario where you know things can come in better than what we expected. And we clearly understand that, but we also remain mindful that there is kind of puts and takes that we're going to experience in the back half of the year. And so I think at this point, we really believe that our guidance accurately reflects our current outlook.
Thank you. Your next call comes from the line of Larry Biegelsen from Wells Fargo. You may now proceed.
One on the recon market, one on Sage, so we estimate the worldwide recon market grew let's say little bit less than 1% in Q1. Do you think it looks like based on your report and J&J's, it looks like the market may have bounce back a little bit in Q2? What do you see in the market? What are your expectations for 2018? Is this a market that can still growth 2% to 3%? And I have one follow-up.
Yes, thanks Larry. I think it's premature for us to speculate on the market growth given we're talking about 10 basis points sequential differences where we haven't seen results within our clearly the market leader and Smith & Nephew. So, I think the market is probably largely unchanged, maybe modestly improved in the second quarter, but again we're going to need to see all the numbers come in.
There is no change to our fundamental view on the recon market. It is a low single digit grower. We're really focused on our ability to take market share particularly on the knee side that where our goal is capture 100 basis points. And like the market I'm sure that will bounce around quarter-to-quarter. But I think we feel pretty confident that once again this quarter we achieved that goal. So whether it's a 1%, 2% it's grower, it's going to move around quarter-to-quarter but that sounds about right.
And then Sage, could you disclose Sage sales in Q2? We estimate Sage sales were about $120 million before the recon in the second quarter of last year about $60 million in Q3 of 2017. So I'm trying to understand, how close you are to the prior run-rate? Do you expect to get back to the prior run rate in the third quarter of '18? Because to follow on Vijay's question, if so that would add about 2% to your year-over-year growth in the third quarter and about 1% in Q4. So just if you can help us understand just a little bit more precision around Sage that will be helpful?
Sure, I appreciate the question. We're not going to break out Sage revenue. It's just a level of details that we're not going to get into. Clearly, they had difficult comp, because the recall didn't happen until the third quarter. So we expect to return, the comps helped us in the back half of the year the year-over-year growth.
But there is also no change to our former comments about the winning back customers. And some of them build up inventory with competitive products and we have work to do to win back some of the customers that we close frustrated during this process. We're on track. We have a full portfolio. We've launched the new product, but we don't expect to be truly on offence until next year. And that's no change from our prior comments.
Yes, I'd just add that. They did have negative growth in the second quarter. And obviously, we're going to have a very strong growth for Sage in the third quarter and then little less strong in the fourth quarter. And obviously, the fourth quarter is a big quarter for all of Stryker. So, its impact, the Sage impact on the fourth quarter will be fairly muted, but certainly a strong impact on the third quarter.
Thank you. Your next question comes from the line of Glenn Novarro from RBC Capital Markets. You may proceed.
Kevin, in your remarks, you called out some another strong quarter out of trauma and extremities, can you give us a little bit more color on what is happening there where the share is coming from in particular some color on specifically the foot and ankle business? And then I had a follow up for Glenn.
So, the extremities as a whole whether it's foot and ankle or shoulder was again the engine of growth for our trauma and extremities business. Overall as you've seen over the past 4-5 years, we've had terrific growth in absolute terms as well as versus the market. We have very strong comps in the prior year, but yet still posted a very strong number.
So, it's been a multi-factorial story here where we've filled out a foot and ankle portfolio that's been strong double digit growth for multiple years. We now have a nice shoulder portfolio and that's even though a small business. It's contributing robust growth and then we've been converting hospitals and we've had a pretty good track record over the past few years and have been able to convert entire hospitals, which is really more in the trauma area.
So it's been a broad-based program across the trauma and extremities business and multi-quarter, multi-year success stories. So, we're very pleased with where we are and with that portfolio and we look forward to continuing to grow.
And then just -- Glenn just real quickly, you're raising your full year EPS by the level of the 2Q be but then you're absorbing an incremental $0.03 of an FX headwind. So what's allowing you to absorb the incremental $0.03 in the back end of the year?
It's really a couple of things but the two big things that really stand out are, first of all our continued strong sales performance, and so, obviously, we raised that guidance and we expect in the back half of the year to continue on the same sort of sales trajectory that we are on. And then the other one, I would say is our confidence in op margin delivery, and we're continuing to deliver higher end of what we put out as the minimum 30 basis points to 50 basis points. And so, I would say the combination of those two things more than allows us to absorb the FX impact.
Thank you. Your next call comes from the line of Isaac Ro from Goldman Sachs. You may proceed.
Just wanted to come back to the recon business, first, and then specifically if we put aside Mako and think about the sort of U.S. knee business, kind of curious what you are seeing in terms of opportunities? Some of your competitors seem to be struggling a little bit. And I'm wondering, if we look in the forward as the year closes out. What you guys can do to trying take a little bit of share opportunistically?
There is really no change to the offence. Here, we are going to continue to drive Mako robot sales and continue to drive them both into our existing customers and into competitive accounts. We have a really nice portfolio on the keen side with our 3D printed products. We'll also be better positioned as we get the instruments out for a full launch of our 3D printed hip cup.
So, no change in the offence regardless with the competitive dynamic, but I think what you've just seen thought is greater variability in terms of recon growth rates on the major players relevant to what we've seen historically. And I think that trend probably continues, but we're going to continue with our offence and that's been working well.
Thank you. Your next call comes from the line of Raj Denhoy from Jefferies. You may proceed.
This is Anthony for Raj. Just maybe sticking on the Mako theme, I'm just wondering when the accounts where physicians were trained maybe a year ago. How do the volumes of Mako implants from those physicians that are little bit aged at this point? And then follow-up would be. What is the overall knee share in those accounts? It sounds like there is a bit of a halo effect. And then lastly just on the data readouts this year and next, just maybe a little bit of color on you know sort of the extensive data that you would expect to have out of the two upcoming meetings? And then I have one follow-up.
Yes, I'll try and get some color probably not going to be the level of detail you are looking for and we try to stick with some of those key metrics when we give the Mako updates. But as we mentioned, we are seeing continued year-over-year and sequential improvement in utilization rate on the robot that's all in and it was up about 55% year-over-year. So, clearly, those surgeons who were trained they are continuing to ramp up, and that's what we've seen over a period of 12 to 18 months as they get more and more comfortable, they continue to do more and more cases on the robot and I think that trend will continue.
We don't know all of the data that will be coming out, but we do expect as you look later in this year in August and November, and then currently at Academy next year that there to be some more meaningful clinical data and we've been collecting as well as posters from others. But we're just two far out right now to know exactly what's been accepted, but you should assume we're starting to enter that period where there'll be more and more clinical data around Mako and the total knee.
And just a follow-up on NOVADAQ and Endoscopy, just wondering, how that played out in that number just given just sort of the sequential trend there a little bit soft relative to our model?
So, NOVADAQ continues to do really well. We are actually very pleased we are on plan. Keep in mind that this acquisition was really about getting the technology and putting it in the hands of our endoscopy sale force. So there was always anticipated that there will be an initial slowdown before a reacceleration in the revenue which is exactly what we played out.
We've been really pleased we started the year with the combined sales forces trained and aligned incentives and going after customers. So, we're really pleased with NOVADAQ, but there was always going to be an initial hiccup because we ended up taking out a lot of sales rep, as we brought the technology into our organization.
Yes, so, any softness that you see in endoscopy is really more linked to the core camera business, not to NOVADAQ. We're actually very pleased with the second quarter performance and continue to be very bullish about this acquisition.
Thank you. Your next call comes from the line of Richard Newitter from Leerink Partners. You may proceed.
Maybe just to start off with the hip franchise. Katherine, you had alluded to the 3D printed Trident 2, I think you said once you get instrument sets more out into the field that should have an impact. What's the timing there for when we could really start to see an acceleration? And if you could provide some commentary around, how we should think about the potential for this you know product launch to potentially get your hip growth and reaccelerated the same way that we did the last time? You had a major hip cup launch where you started to accelerate and sustain above market growth for multiple, multiple years.
So, keep in mind Accolade II was a hip stem and that tends to be more impactful. With respect to this new 3D printed, hip cup which is a great product and certainly having new technology for the sales force is always a bonus. I think you'll start to see an impact in Q3, but whenever you launch a new product into the hip or knee market, as you've seen over the years, it tends to be a gradual ramp-up.
And so, we're in that process right now, we just went the full commercial launch at Academy and now that follows with getting the instruments out there and building up that. So, I think you'll see some impact in the third quarter. Our hip business has been growing mostly in line with the market and hopefully this helps accelerate, but I don't want to get too far in front of us to the timing of that. But certainly, we feel like this is a product that will help.
Thank you. Your next call comes from the line of Craig Bijou from Cantor Fitzgerald. You may proceed.
I wanted to get your updated thoughts on the Spine business and especially given some of the dynamics that you guys talked about the core spine under pressure, you had success with the Tritanium, the new product, overall challenged market. But I know you've been asked the question before, but how are you thinking about developing new products versus potentially growing through acquisitions whether large or small? And then if it is in-house development maybe you can walk through some of the planned projects or at least areas of spine that you're looking at?
Yes, so I'll start by saying really the reiterating to my earlier comments. It remains a tough market. It has been challenging for the market overall. But it's a market we are overall 100% committed to. It is the largest market in orthopedics. There is tremendous unmet need. And we have the benefit given our size and the diversity of our product portfolio that we can weather through when the certain business is challenged as spine has been. We are encouraged modestly by the results. We do need to continue and we are with allocated more R&D dollars that continue to refresh our core portfolio. Our Tritanium product has been terrific, but there is a portfolio beyond that and we're investing heavily in that.
With respect to the M&A component, again no change, all of our divisions have dedicated BD people, looking at targets and we're always evaluating and making that make versus buy decisions. So, we're committed to this market and we're committed to growing it organically whether or not we do an acquisition same answer for any of our divisions. We'll evaluate targets and make the best decision to ensure that the returns are optimizing our commitment to shareholders.
Thank you. Your next question comes from the line of Matthew O'Brien from Piper Jaffray. You may proceed.
This is Will on for Matt. Thanks for taking the questions. My first question, I apologize, if I missed this in the opening remarks. But how many U.S. hospitals have a Mako installed? And then I guess further given the cementless application that was approved in the fourth quarter, I think you've mentioned that exiting 2017 cementless represented 24%. Where is that currently? And I assume it's trending up, but any clarification there will be helpful?
Sure. In the U.S. at the end of the second quarter, we had 462 robots in the field. You should assume the majority of those are single robots given where are in the launch. We do have some hospitals like the hospitals of special surgery for example in New York that has four. They are more of the exception.
But again as robot gets in there and more and more surgeons start to show interest, we tend to see those accounts start to look at robots and that will continue. I don't have the exact breakdown, but you should assume the majority of those are single robots. With respect to cementless, we continue to see market adoptions of about 26% of our knees are now cementless.
Thank you. Your next question comes from the line of Joshua Jennings from Cowen. You may proceed.
Congratulations again on the strong performance in 2Q. I was hoping to just ask quick one question on margins and one question just on the total joint business. Just the core operating margin performance seemed to be stellar this quarter. I think the expectations were for you get to the top end of the range in the second half of the year, which you exclude the acquisition impact. You pretty much have an 80 basis points expansion quarter in Q2. Were there any one-timers in Q2 that drove that performance? And then, should we still be thinking about the second half being close to the top end of the range as I think you got it to the beginning of the year?
No, if you sort of dissect the 50 basis points performance, which by the way includes covering of 30 basis points headwind coming from acquisitions. It really is across the board. Obviously, a lot of this is coming from some of our CTG programs that are really starting to pay off specifically our indirect purchase programs and as well as some of our shared service programs. But the other thing too I will tell you, is that we really instilled this mindset within the organization and we've aligned our incentives to focus on driving these improvements. And we're really seeing great results across all our divisions.
And there were no unusual one-timers in the quarter. It was really a terrific performance across the businesses.
Thank you. Your next call comes from the line of Jeff Johnson from Baird. You may proceed.
I wanted to ask a Neurotech question or, I guess, a couple of questions in Neurotech. I guess just one as we kind of move from 8 to 24 hour treatment protocols. Just kind of an update on where we are in infrastructure and like I said protocol and things like that across the industry, are we seeing progress there? And I'm surpassed Katherine, I know I heard you say, you don't take a couple of quarters to get inventory but that rounds out kind of last 15% or so. I think of what you needed to cover in hemorrhagic. Is there anything else in the pipeline we need to be thinking about anything that could help reduce antiplatelet therapy or anything else that we could see coming on, on the stroke side over the next year or two from you guys?
So, we're clearly really excited about the performance across the Neurotechnology platform and as well as a Neurovascular in hemorrhagic and ischemic. It's incredibly difficult to say this much growth was attributable to the expanded indications, but there is no doubt at helping. It allows us to get patients to the right treatment center in a manner that allows for intervention and it really does underscore the efficacy of the data, which is based on stentrievers.
We are launching our aspiration device that further enhances our portfolio. Clearly, the data is all around stentrievers, and we believe that is the primary methodology. But there are some who opt to aspirate alone, at least initially, although about 40% to 60% of the time they do need to go back in with the stentrievers. But this will allow us to address that patient that certain group, and so this is a market that's has a lot of innovation. So I have no doubt there will be more stuff coming, but nothing I would call out at this time.
[Operator Instructions] Your next call comes from the line of Kyle Rose from Canaccord Genuity. You may proceed.
This is Brandon in for Kyle. Just to kind of keep on Mako. As we move to the rest of the year, competition in robotics should start to pick up, if that at least at that minimum maybe cost some more noise in the market. Can you speak to what, if any really competitive noises built into your guidance assumptions for the rest of the year in terms of Mako? And then I have one other Mako follow-up.
Yes, we really don’t have anything built in for the outlook and those products have to get launched and we have to see what there speakers are. I would say I would tell you we're just really focused on the features and benefits of our robots, which we believe are comprehensive and have enabled us to drive some very robust share gains and continued uptake on a quarter-to-quarter basis. So, no change in our outlook, and we are never going to underestimate competitors, but with nothing on the market yet, it's difficult to speak to differences in the technology.
And I would say we are very pleased with the robot sales, the actual numbers sold in the second quarter, and the level of interest is still extremely high. So, I expect continued strong robot sales regardless of competitive activity.
Just one last one on Mako, more thinking of long-term and really appreciating that there is still plenty of leg room for Mako in total knees, can you maybe just speak to the near term plans or long term plans to expand the usage of Mako into other procedures? And one, I guess that I would specifically ask one that comes to mind is in spine cases given that that's a market that's really just starting to develop?
Sure, we absolutely believe there's opportunities for the Mako technology and other indications within joints, spine, shoulder. But in terms of timelines, we're not going to get specific at this point in time. We do believe what we follow on opportunities, but right now the primary focus is really in optimizing the total knee launch.
Thank you. Your next call comes from the line of Steven Lichtman from Oppenheimer and Company. You may proceed.
Hi guys, this is a one question and one follow-up. First on the macro front, what are your latest views on the state of the capital purchasing environment in the U.S., anything of note there or are things stable? And separately, how do you see things progressing in the UK following some restrictions on elective procedures earlier in the year?
Yes, so we feel good about the capital market in the U.S. Just look at the momentum, we're delivering in our medical business, selling 39 robots which is certainly high ticket capital, continued uptake for our instruments, power tools. So, capital encompasses a lot of different price points and a lot of different technologies, but our capital business is doing really well. We're past the bad blockage that we saw in the first quarter which is specific to the full season.
Yes, Europe really had a terrific second quarter this year and this year once again we'll be accretive to Stryker's overall growth rate, which it has been every year since we launched the Transatlantic Operating Model.
And I think you alluded to this when you gave us Mako metrics, but I was wondering if you talk about trends in utilization in partial knees. Does that application continue to expand for you?
Yes, it's much more the total knee story. Obviously, the partial is much, much further in its lifecycle and it’s a much smaller market. So, keep in mind, the utilization rates I gave you were for all procedures on the Mako robot that roughly 55% change year-over-year. But it's driven more and more by the total knees because it represents well over 50% of all the procedures that are happening on the robots.
Thank you. There are no further questions at this time. I'll now turn the conference over to Mr. Kevin Lobo for closing remarks.
Thank you all for joining our call. Our conference call for third quarter 2018 results will be held on October 25th. Thank you.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.