Welcome to the Second Quarter 2024 Stryker Earnings Call. My name is Luke, and I'm your operator for today's call. At this time, all participants are in a listen-only mode. Following the conference, we will conduct a question-and-answer session. This conference 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, Chair 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 Jason Beach, Vice President of Finance and Investor Relations. For today's call, I will provide opening comments followed by Jason with the trends we saw during the quarter and some product updates. Glenn will then provide additional details regarding our quarterly results before we open the call to Q&A. In the second quarter, we delivered strong organic growth sales of 9% against last year's nearly 12% comparable. Our performance included high single-digit growth across both MedSurg and Neurotechnology and Orthopaedics and Spine. This broad performance reflects our diverse business model, sustained demand for our products and our team's strong commercial execution. Our organic growth was well balanced between the US and international with both growing roughly 9%. Our strong results were led by double-digit organic growth in instruments, neuro cranial and Mako and high single-digit growth in our medical, endoscopy, neurovascular, trauma and extremities and knee businesses. Internationally, our organic sales growth accelerated from the first quarter with strength in Europe, emerging markets, Australia, New Zealand and Japan. As we expand our global share, we continue to see international markets as a key catalyst for our long-term growth. On the M&A front, we continue to execute on our offense. In July, we completed the acquisition of Artelon, which specializes in innovative soft tissue fixation products for foot and ankle and sports medicine procedures. Also yesterday, we closed our acquisition of MOLLI Surgical. MOLLI offers wire-free soft tissue localization technology that allows surgeons to precisely mark the location of lesions for removal during breast cancer surgeries. MOLLI's differentiated technology enhances our endoscopy portfolio. We remain bullish about our deal pipeline and we expect continued activity as we move into the back half of the year. We delivered quarterly adjusted EPS of $2.81, reflecting 10.6% growth compared to the second quarter of 2023. This performance was primarily driven by the strength of our sales as well as continued expansion of our margins. Finally, we are raising our expectations for 2024 and now anticipate full year organic sales growth of 9% to 10% and adjusted earnings per share of. Coming off full year organic sales growth of 11.5% in 2023, our updated guidance reflects the strength of our capital backlog, innovative product portfolio, healthy procedure volumes and passionate commercial execution across the globe. I will now turn the call over to Jason.

Thanks Kevin. My comments today will focus on providing an update on the current environment, capital demand and select product highlights. Procedural volumes remained robust in the second quarter driven by strong fundamentals, increased adoption of robotic assisted surgery and healthy patient activities with surgeons. We continue to expect strength in procedural demand as we move into the second half of the year. Demand for our capital products also remained healthy in the quarter with continued elevated backlog across our endoscopy and medical divisions. Continued patient interest in Mako contributed to our best ever second quarter for installations worldwide and in the US with high utilization rates across the globe. Also in the quarter, we reached over 1 million robotic total knee procedures performed to date with Mako and Triathlon. We expect the growing momentum in installations and utilization will continue to drive sustained growth in our hips and knees businesses. Our recent product introductions highlight our commitment to innovation and the durability of our innovation cycle. Pangea's comprehensive plating system complements our market-leading nailing portfolio and will enable sustained above market growth in our core trauma business. We expect Pangea availability to continue to ramp and reach full launch in the US by the second half of 2025. Next, our LIFEPAK 35 defibrillator and monitor continues to drive significant excitement in the marketplace. This flagship product within our emergency care business unit was launched near the end of the second quarter with a strong order book, and we believe it will have a multiyear benefit to our medical division. Lastly, we announced this morning that we received FDA clearance for our Spine Guidance 5 Software featuring Copilot, which introduces smart powered instruments to our Q guidance ecosystem. This innovative technology is designed to support surgeon precision by providing auditory and sensory alerts when approaching anatomical boundaries during spinal procedures and enhanced patient safety and outcomes. Copilot is an important step on our development pipeline which also includes Mako Spine. Mako Spine with Copilot is on track to launch in Q4 and Mako's Shoulder is on track to launch at the end of the year. With that, I will now turn the call over to Glenn.

Thanks Jason. Today I will focus my comments on our second quarter financial results and the related drivers. Our detailed financial results have been provided in today's press release. Our organic sales growth was 9% in the second quarter compared to 11.9% in the same quarter of 2023. Average selling days are in line with 2023. We had a 1.1% favorable impact from pricing. We continue to see positive trends in our pricing initiatives, particularly in our MedSurg and Neurotech businesses, all of which contributed positive pricing for the quarter. Foreign currency had a 0.9% unfavorable impact on sales. In the US, organic sales growth was 9%. International organic sales growth was 8.9%, driven by positive sales momentum across most of our international markets. Our adjusted EPS of $2.81 in the quarter was up 10.6% from 2023, driven by higher sales and partially offset by foreign currency exchange translation which had an unfavorable impact of $0.03. Now we'll provide some highlights around our quarterly segment performance. In the quarter, MedSurg and Neurotechnology had constant currency sales growth of 9.8% and organic sales growth of 9.7% which included 10.1% of US organic growth and 8.2% of international organic growth. Instruments had US organic sales growth of 11.9% led by strong double-digit growth in the surgical technologies business. From a product perspective, sales growth was led by power tools, waste management, smoke evacuation and Steri-Shield. Endoscopy had US organic sales growth of 8% with strong growth in its core endoscopy business and its sports medicine business. This growth was led by the continued success of the 1788 platform and sports medicine shoulder and knee products. This was somewhat offset by slower communication sales due to the timing of installations which will recover in the second half of this year. Medical had US organic sales growth of 11.9%, driven by strong sales performances in its emergency care and sage businesses with growth in transport capital, defibrillators and sage products. Neurovascular had US organic sales growth of 2.3% which reflects some US supply disruption related to flow diversion products. And finally, Neuro Cranial had US organic sales growth of 10.6%, led by double-digit growth in our bone mill, bipolar forceps and cranial maxillofacial products. Internationally, MedSurg and Neurotechnology had organic sales growth of 8.2%, led by double-digit organic growth in our instruments, neurovascular and neuro cranial businesses. Geographically, this included strong performances in China, Australia and Japan. Orthopaedics and Spine had constant currency sales growth of 8.9% and organic sales growth of 8%, which included organic growth of 7.3% in the US and 9.8% internationally. Our US knee business grew 6.6% organically, reflecting our market leading position in robotic assisted knee procedures and the continued strength of our installed Mako base. Our US hip business grew 4.3% organically, fueled by our insignia hip stem. Our US trauma and extremities business grew 9.1% organically, with strong performances across our upper extremities, biologics and core trauma businesses. Our US spine business grew 4.4% organically, led by the performance in our interventional spine business. Our US other ortho business grew 15.4% organically, particularly driven by robust continued momentum of Mako installations. Internationally, Orthopaedics and Spine grew 9.8% organically, including strong performances in Canada, Europe and most emerging markets. Now I will focus on operating highlights in the second quarter. Our adjusted gross margin of 64.2% represents approximately 30 basis points of favorability against the second quarter of 2023 and 60 basis points sequentially as compared to the first quarter of this year. This favorability primarily reflects positive pricing trends and improved material cost and manufacturing efficiencies. Adjusted R&D spending was 6.5% of sales, which was approximately 10 basis points higher than the second quarter of 2023. Our adjusted SG&A was 33.1% of sales, which was consistent with the second quarter of 2023. In summary, for the quarter, our adjusted operating margin was 24.6% of sales, which was approximately 30 basis points favorable to the second quarter of 2023. Net adjusted other income and expense of $54 million for the quarter was $12 million lower than 2023, driven by favorable interest income in our invested cash balances. The second quarter of 2024 had an adjusted effective tax rate of 15.2%, reflecting the impact of geographic mix and certain discrete items. For 2024, we still expect our full year effective tax rate to be in the range of 14% to 15%. Focusing on the balance sheet, we ended the second quarter with approximately $2 billion of cash and marketable securities and total debt of approximately $12.2 billion. During the quarter, we repaid $600 million of debt that came due in May. Turning to cash flow. Our year-to-date cash from operations is $837 million, reflecting the results of net earnings somewhat offset by working capital changes. Based on our year-to-date performance and our positive outlook related to sustained procedural volumes and a healthy demand for our capital products, we now expect full year 2024 organic sales growth to be in the range of 9% to 10%, with favorable pricing impacting of approximately 0.5%. If foreign exchange rates hold near current levels, we anticipate a moderately unfavorable impact on the full year sales and now expect EPS will be negatively impacted in the range of $0.10 to $0.15. This is reflected in our guidance. Given our sales momentum, we now expect adjusted net earnings per diluted share to be in the range of $11.90 to $12.10 per share. And now I will open the call up for questions.

At this time, we will open the floor for questions. Our first question will come from Larry Biegelsen with Wells Fargo Securities. Your line is now open. Please go ahead.

Good afternoon. Thanks for taking the question and congrats on a nice quarter here. So, Kevin, it's hard to not notice the quote in the press release about you're being excited about the product and M&A pipeline. So I'd love to hear your updated thoughts on M&A in 2024. You've talked about smaller deals in the first half and potentially larger deals in the second half. Is there any change to your view, and how should we think about the impact of larger deals on the margin targets you have for '24 and '25? And I had one follow up.

Yes. Listen, we're still committed to our margin targets of 200 basis points, roughly 100 basis points this year, another 100 basis points next year. And that is inclusive of M&A. We do have a very active deal pipeline. Most of them are in the tuck-in variety and most of them are not very large. But you continue to see us be active, as you've seen in the first two quarters of the year, much more active than we were last year. And we will be very active in the second half of the year. It's always hard to predict exactly which deals will land, as you know. But we have a very strong balance sheet now, given the debt that we paid down after Wright and Vocera, and we're going to put our balance sheet to work.

That's helpful. And Glenn, in order to hit the margin goal for this year, it requires a pretty big step up in the margins in the second half. What are the drivers? Is it gross margin or OpEx? And what's your visibility? Thank you.

Yeah. Larry, really good question. I think if you looked at our performance historically, you would always see that op margin leverage in the second half of the year just really, really takes off. And so I don't think this year is really going to be different from performances in past years. I would tell you that we're seeing, like you saw here in the first half of this year, kind of a good balance, honestly between gross margin and SG&A. I think moving forward in the back half of the year, just given sort of how we spend in SG&A our variable comp models, we'll probably see more leverage come out of SG&A than gross margin in the back half of the year. And we're very bullish on, like Kevin said, still holding to our 100 basis points of op margin expansion for this year.

Thank you.

Our next question will come from the line of Robbie Marcus with JP Morgan. Your line is now open. Please go ahead.

Thank you for taking the questions. I have two. First, Kevin, you don't provide quarterly guidance, and I noticed your comments during the quarter matched expectations. However, you raised the annual guidance, so could you explain how the second quarter aligns with Street expectations while confidently raising both top and bottom line guidance? My second question relates to what you're observing in the capital equipment and procedure volume area. Could you share your insights on that as well? Thank you.

Yeah, sure. Thanks Robbie. And thanks for remembering that we don't guide to quarters. We were actually very pleased with the way the quarter played out. We can see our seasonality and how things are going to flow from quarter to quarter. We had a big Q2 last year, big comp. If you look at the back half of the year, we're very bullish on capital. We have a big backlog, particularly in endoscopy and in medical. We're also seeing very strong demand. As you've seen, quarter after quarter, our Mako installations are very high. That leads to future strong demand for hips and knees. And July is off to a really strong start in joint replacement. We've also been able to achieve more price than we thought at the beginning of the year, and we expect that that price tailwind will continue into the back half of the year. And lastly, I'd say the new products, the two big products we've talked about, Pangea and LIFEPAK 35, are both receiving tremendous positive feedback and really both had very negligible impact in Q2. But you're going to see those in a big way in Q3, Q4, and into next year. So a lot of tailwinds that are going to push our growth up in Q3. Certainly in Q3 is going to be a big one and also in Q4. So we're very confident of raising the guide. Love the fact that we have 10% at the high end of our growth coming off a year of 11.5% last year and 9.7% the year before. So we are growing off big numbers and we're feeling very good about the top line.

Appreciate it. Thanks a lot.

Our next question comes from the line of Ryan Zimmerman with BTIG. Your line is now open. Please go ahead.

Thanks for taking the questions and congrats on the nice quarter here. I want to kind of dovetail on Robbie's question a little bit and appreciate that there's some product drivers in the back half of the year. Kevin, there's some easier comps. Can you just comment maybe on seasonal dynamics a little bit, and expectations around the health of the orthopedic market, the ability to see kind of that sustained growth rate through the back half of the year and then potentially into 2025? And then I have one question for Glenn on pricing.

Yeah. Listen, we're not changing our story on the market. So we've been saying for many quarters now that we see this, the hip and knee market as kind of a mid single-digit market and our ability to outpace that market largely on the backs of Mako, as well as insignia for hips. But that's the same story we've been telling. And frankly, we're seeing that. And we're seeing that in July. As we talk to surgeons and see their surgery schedules, we see a healthy and sustained good market for hips and knees elevated from pre-pandemic and something that we see through the end of this year and potentially into next year.

Very helpful. And then, just the second question for me around pricing, Glenn, I mean, it's really nice to see the tailwind that you're getting from pricing. As you think about pricing as an opportunity, I mean, do you see an upper bound on pricing where you can't go beyond that? I mean, how long can you sustainably push pricing as you think about both this year and then potentially into 2025.

Yeah. Maybe I'll limit my comments really just to 2024. So I would tell you that if you just look at our pricing teams and what they've accomplished, first of all, we've seen really great positive outcome on the MSNT side and related to the MSNT products. And I would tell you that if you think about their product cycle and how they introduce new innovations, we'll constantly gain price on those innovations. I would tell you that on the ortho side, I'm equally pleased. We're addressing this in contracts as they come up. And frankly, we're less negative. We are just less negative than we used to be on ortho, which honestly is a win. I would tell you that this carries over not just to the people at our enterprise level that are working on this, but it's down in the field with our salespeople. So the divisions have put in various programs that drive certain incentives related to positive pricing or improvements in margins. And so my money's on our salesforce in terms of keeping this going. That's what I would say. I would tell you that if you just look at our performance year-to-date in Q1, 0.7%, 1.1% in Q2, in the back half of the year, we're going to see some anniversary of products and contracts. And so there may be a little bit of moderation. But I do think that to Kevin's point, there's a lot of newer products that are going to be out there that are going to drive price that maybe isn't necessarily captured in here, but I'm bullish on it. I think we'll continue to see really good price performance this year, and I'll hold my comments till we guide 2025.

Thank you.

Our next question will come from Joanne Wuensch with Citibank. Your line is now open. Please go ahead.

Thank you very much, and very nice quarter. I'm trying to figure out where to go here because there's so much. I'm going to pause on Mako. It sounds like when I look at my notes, the fourth quarter '23 was record Mako, first quarter '24 was record Mako, second quarter the same. What is going on that each quarter you're placing record Mako robots. Thank you.

Thank you for the question. A significant factor is our growth in international markets. We are rapidly expanding in places like Japan, emerging markets such as India, and even in Europe. Internationally, we're experiencing a phase similar to what the US went through four or five years ago, which is a new source of support for us. While we have strong market penetration in Australia, the rest of our international business had previously lagged, but that’s now changing robustly. Additionally, our US team has been exceptional in promoting Mako technology, leading to an increase in the percentage of hips and knees being performed using our robots each quarter. As we introduced more offerings, demand has surged, with customers opting for our technology and increasingly installing additional systems. Many facilities still don't have Mako robots, and our teams are actively pursuing those opportunities, which is very encouraging. The software improvements we've implemented, like the 4.0 for hips and 2.0 for knees with functional alignment, have also contributed to our growth in a significant way. Looking ahead, we plan to introduce spine and shoulder applications for Mako, indicating that there’s still considerable potential for further advancement.

Just as a follow up to that, with spine and shoulder coming on, how do you anticipate rolling those out? Are there software and hardware upgrades? Just walk us through that. Thank you, and have a great night.

Yes. Thank you. Yes. In both cases, there are attachments. So it's the same robot that you can use, but there are attachments that would be specifically for spine as well as software. So it comes with both software and hardware, just as the knee application did when we launched the total knee back in 2017.

Our next question will come from Vijay Kumar with Evercore ISI. Your line is now open. Please go ahead.

Hi, guys. Thanks for taking my question. Apologies for the audio issues on our end. Kevin, maybe one on LP 35, maybe talk about the launch. I think in the past it mentioned some capacity constraints. Did it contribute in 2Q, are we at full launch mode right now?

Well, we've already started taking orders. Let me put it to you that way. And we have the ability to ramp production pretty fast. So this is not like an implant launch. Like, if you think about Pangea, you have to make sets of implants, you have to make sets of instruments. This is an assembly operation, so we'll be able to scale this pretty quickly. And so I wouldn't look at this as being capacity constraint. The only constraint is obviously getting out there, having customers see it, putting it in their budgets, ordering it, and then our ability to meet the demand will be faster out of the gates with LP 35 than we would be for any kind of an implant launch. So don't think about capacity as a major concern.

Understood. And maybe one on guidance here. The overall organic dollar revenues, it seemed in line versus Street, but guidance was raised. Just talk about; I think you mentioned about July being strong. Looks like there were some one-off items impacting in 2Q. So talk about the visibility and the confidence in the guide raise for back half.

Yeah. Listen, we don't raise guidance without having pretty good confidence. And you saw we raised after Q1, we raised again after Q2. We have very good visibility into our capital, and we have a very significant backlog of capital which we know we're going to ship. So that gives us a lot of confidence, and then how you feel about the procedures. And that's the other part of it. And again, we have pretty good visibility into the procedure. So at least for six months, we've tended to be pretty good at predicting six months. Predicting beyond six months, that's a little harder. But we feel very confident that we're going to deliver this raised guidance. And don't be afraid if we scare 10% again, that'll be the third year in a row of being hovering around that number or being above that number. And so we have a lot of headwinds. I think I enumerated those earlier in the call, and those tailwinds are really going to help us.

Understood. Thanks, guys.

Our next question will come from Matt Taylor with Jefferies. Your line is now open. Please go ahead.

Hi, guys. Thanks for taking the question. I guess, I wanted to follow on. I think it was Travis's question before asking about some of the growth drivers next year. You called out Pangea and the Defib as being big incremental drivers. Could you help us think about the shape of those launches or the contributions in 2025, any guideposts that you would give us in thinking about how they could roll in and contribute the opportunity sets? And I guess how long you view those as growth drivers in '25 and beyond?

They are both very important for our future growth. I believe LIFEPAK 35 will experience faster gains, with a noticeable increase in sales in the second half of this year, followed by strong performance next year and the year after. These defibrillators tend to have a long lifespan, with some customers using them for seven to eight years, which will provide ongoing support in the long run. However, we will see significant growth in the first two to three years. On the other hand, Pangea has a different launch schedule and won't be fully available until the second half of next year. It will take several quarters to build all the necessary instrument and implant sets. The launches will be long-lasting, contributing steadily to our core trauma business along with excellent nailing systems and plating. This will position us as a leader in the trauma and extremities market, which is very exciting. However, we have more products in the pipeline. We have Mako Spine, Copilot, and Mako Shoulder coming soon, and we are still gaining new indications for 1788, particularly with new fluorophores to target various cancers, expanding our market opportunities. The products we are releasing now will have benefits that extend beyond just one year, and many of them haven't yet been launched internationally. While we have begun introductions in the US and some European markets due to UMDR regulations, these products will be part of our conversations in a year or two as we prepare for international launches. This ongoing product innovation cycle is something to be excited about, and it contributes to our recent growth projections. As we introduce new products, we gather customer feedback, affirming that both Pangea and LIFEPAK 35 are strong performers. The incoming orders indicate these products will be successful and contribute positively over multiple years.

Thanks, Kevin. Could I ask a follow up on just the margins? We talked a lot about the margin phasing this year, Glenn, and these contributions in the second half. And I guess, I was just wondering if you could make some high-level comments on how the shape of the margin progression would look in 2025. You think it's going to be similar where there's more expansion in the second half than the first half? Or would it be different because of the progress you're making this year?

Hey Matt, it's Jason. As we think about 2025, obviously we'll talk more about that in January. Certainly, you can expect us to deliver on the 100 basis point of op margin expansion next year, but in terms of how that shape will look, we'll give you more information when we get to January.

All right. Thanks, Jason.

Our next question will come from the line of Josh Jennings with TD Cowen. Your line is now open. Please go ahead.

Hi, good evening. Thanks for taking the questions. Congratulations on organic revenue growth being raised quarter. We're looking for just some commentary Kevin and team on just on inventory surgical center channel in the United States. Our understanding is that just the infrastructure, the number of ortho, ASCs or the bottleneck in terms of the pace of migration for total joints into that setting. Anything you can share just in the first half in terms of infrastructure build out, was it impacted by interest rates and any change in the outlook in this migration pace over the next couple of years for total joints? And then lastly, sorry for the three-part question, just the pricing commentary for the company. Should we hold that for the ASC business as well? Or was there more pricing pressure or less pricing pressure, or more pricing improvement or less pricing improvement in that ASC channel? Thanks for taking the question.

Okay. I hope I get all parts of this question in my answer, but let me start by saying that the pricing that we're seeing, ASC versus hospital, there really isn't any difference. Our pricing is very consistent across the different channels where we sell. So that's the first part. The second part is, I'd say the ASC continues to be a positive trend that you're going to see and it's not going to slow down anytime soon. Even with interest rates being high, hospitals are finding a ways to get their ASCs built and constructed and we've seen continued, I would call it steady growth. This second quarter finished with the highest percent of knees and hips done in ambulatory surgery centers. We're not going to give the exact number. Perhaps at the end of the year we'll give you the exact percentage, but it continues to climb. Our percent of hips and knees done in the ASC every quarter continues to move up. And that happened in the first quarter. It happened again in the second quarter. And if we look at our ASC, our growth in ASCs, it is accretive to Stryker's overall growth. So we are growing at a high rate in ASCs. This trend we believe favors us given the breadth of our offering in orthopedic ASCs. And so we welcome this shift and so far so good.

Great. Thanks for that. And then just a follow up. I know you've kind of given in Stryker's outlook for multiple ortho categories or segments. I was hoping you could do the same for the US spine industry. And just your outlook there. Health of the market and you got Q Guidance and Copilot update of approval today. We're launching Mako's Spine. Do you think Stryker Spine is kind of maintaining share in the first half of 2024 and can gain share with these enabling technology ads? Where is Stryker Spine gaining share currently in the US market? Thanks a lot.

Yeah. Josh, this is Jason. I'll take this one. I would say just as you think about specifically the second quarter, we'd say we have had a solid quarter in spine led by interventional spine. And as we think to the future, we've certainly talked about Copilot and Mako Spine and how that will help us in the spine market. And so really nothing additional to add there in terms of how we think about the future.

Appreciate it. Thanks.

Our next question will come from the line of Danielle Antalffy with UBS. Your line is now open. Please go ahead.

Good afternoon, everyone. Thank you for taking my question. Congratulations on a strong quarter. I have a follow-up question regarding the ASC dynamic. Kevin, I’m interested in whether you’re noticing any differences in market share between the ASC and outside the ASC for both the robot and the hip and knee implants. I’m asking this because I believe one of Stryker's advantages is the breadth of its product offerings in the ASC, so I wanted to confirm that with you.

Yes, Danielle, what I'd say is that if there is a big renovation or new construction, we do extremely well. So I don't want to speak on behalf of all ASCs, right? If it's already an ASC, that's an orthopedic ASC, and there's entrenched surgeons that are using competitive products, that's a little harder for us to displace. But if they're doing a big renovation or if they're doing new construction, we have a fantastic offense that wins at very, very high rates. And that's been one of the engines that's caused this tremendous growth for us in the ASC and why we continue to believe that that's the area where we're going to be laser focused. That's the area where we are winning today, and that's the area we're going to continue to win in the future. So it's not necessarily all ASCs.

Got it.

That segment is definitely seeing ongoing new construction all the time.

Yeah. Got it. Understood. Thank you so much for that. And then just to follow up on that, if we fast forward, so the shift has been happening over the last few years now. I mean, where do you think this settles out? If you're talking about hips, knees and extremities and percentage of procedures being done at the ASC versus in the hospital in, say, five years. Thanks so much.

I don't have a crystal ball, but I believe it's going to go higher. This is an undeniable trend. Surgeons appreciate it because they have a stake in it, and patients like it since they don't have to worry about parking and it's conveniently located. Everyone is satisfied with the situation, and it benefits the healthcare system. As a result, I expect this growth to continue. I can't predict the upper limit, but my perspective has changed since five years ago. I anticipated growth, but it's occurring at a faster pace than I expected. We're even starting to see total ankle and shoulder replacements done in Ambulatory Surgical Centers (ASCs), and lumbar spine surgeries, which I didn't think we would see. More procedures will be performed in this setting. There will be limitations on revisions and high-acuity scoliosis procedures, but overall, growth has surpassed our internal expectations and I believe this will continue. The main limitation is the construction of these ASCs and managing the financing, capital, and ownership arrangements between hospitals and surgeons. I see this trend continuing to grow without a clear stopping point. In five years, procedures currently in the 10% to 15% range could surpass 15% next year and might even reach 30% or 40%.

Thank you. Thank you.

Our next question comes from Mike Matson with Needham. Your line is now open. Please go ahead.

Yeah, thanks. So good to hear about the momentum in the international business. I wanted to ask about what that would mean to your margins. If you see that business continue to outpace the US, how does it compare from the gross and operating margin perspective? Is this something that could be a headwind to your margins?

As we examine the international aspect, it's important to note that we do not include R&D expenses in our international performance numbers when assessing margins. Market conditions can differ significantly from one region to another. In some developed markets, we are observing strong pricing and solid operating margins, while in certain emerging markets, we may encounter slight challenges related to pricing. However, looking ahead, we acknowledge the role of international sales in enhancing our overall margin profile. We are preparing for the necessary infrastructure and savings to ensure we maintain consistent margin levels, targeting an improvement of over 30 basis points once we address the anticipated 200 basis points increase. While there may be some challenges, I believe we can manage them effectively and do not expect significant headwinds that we won't be able to overcome.

Okay. Got it. And then just, I think you did do one small acquisition, the Artelon company, I believe is in the extremities area. Can you just comment on that and kind of how it fits or what it brings to the table?

Yeah. Listen, this is a gap filler for us in soft tissue fixation that's used in foot and ankle procedures by sports medicine doctors, as well as foot and ankle doctors. It's an elegant, terrific product. We're really excited about it. Both of our sports business unit and foot and ankle business units, both teams are going to be selling this product based on the surgeon call point that they have. So really, really terrific product. We've been tracking the company for quite some time, and we're not going to get into details of how much. It's not a big product, but it's a really great gap filler that, again, our sports business has, as you know, been growing at very high rates for many years now, and this fits in with them. It also fits in with our foot and ankle business.

Okay. Got it. Thanks.

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

Hi. Thanks so much for taking the question. Just jumping off of the spine question earlier. The interventional spine business had a good quarter this quarter and last quarter as well. Can you talk about what makes up that business for you and why you think you're seeing strength there? Is this more of a market tailwind that you're capitalizing on or specifically Stryker.

Yeah. Listen, this IVS business of ours has been a really terrific business, if you think about what is in that business. We bought these curved balloons from the CareFusion a while back. We acquired the spine jack product. We've also developed some terrific internal products. We launched the OptaBlate Blade product. So we have the pain docs and we have the oncology. So two different call points within our IVS business, and a pretty robust portfolio. And just outstanding commercial execution has been really a terrific engine of growth for us. And it's an area we like. And we continue to believe we're going to expand in this area at some point in the future. We're certainly going to be adding salespeople, as we have been doing, because we have the product portfolio, partially organic and partially inorganic.

Great. And you maintained expectations to launch Mako Shoulder later this year. What are you seeing in the market with Zimmer's early launch of its shoulder robotic application? And any updates you're seeing in the use case of shoulder robotics?

We haven't received any competitive feedback yet, so it hasn't impacted our business. It's still early, so there's nothing to share at this time. Once we have more information, we will inform you. However, we feel optimistic about our Mako Shoulder.

Our next question comes from the line of Jayson Bedford with Raymond James. Your line is now open. Please go ahead.

Good afternoon. Thanks for squeezing me and I'll be quick. Just a neurovas. I thought I heard you mention a supply issue within flow diverters. I'm just wondering, when will this resolve? And maybe you can just give us a broader view on the health of the supply chain, whether it be input costs, freight costs, et cetera.

Hey, Jason. It's Jason. I would say just overall, Stryker, I would say supply's in quite good shape. Do we see spotty issues like I mentioned, relative to neurovascular? Yes. We saw a little bit of a supply disruption as it relates to our medical business outside of the United States as well. But these things are resolving themselves. July for neurovascular, off to a good start. And as it relates to medical, I think you should expect robust growth in the second half as well. So nothing from a supply standpoint is a concern for us as we move forward.

Okay. That's helpful. And just quickly, I wanted to follow up on the foot and ankle commentary. I'm just wondering why you think the market is soft and just historically, what drives the rebound out of these lulls.

There are various factors influencing the situation, including operating room (OR) time being prioritized for other procedures. Surgeons are facing challenges because ORs are being allocated for procedures that generate higher revenue. Additionally, patients are experiencing copays that can lead to delays in treatment. These are just a few of the contributing factors. We have seen similar situations in the past, and while it took us by surprise, we remain confident in our business and portfolio. Patients with bunions will not resolve their issues on their own, so we anticipate they will return to the market, and we believe we'll be well-positioned for that. However, we have experienced two consecutive quarters of this trend. We will keep you updated on how the third quarter performs. Regardless of market conditions, our trauma and extremities business is expected to maintain high growth.

Thank you.

Our next question will come from Drew Ranieri with Morgan Stanley. Your line is now open. Please go ahead.

Hi, thanks for taking the question. Maybe just one for Kevin, but I think you also mentioned that you did another small acquisition of MOLLI. But just curious if you can kind of detail a bit more about that deal. And I'd imagine it would be fairly small, but I'm kind of curious to hear about how this kind of informs your overall breast strategy in the market, how you might be able to bundle this with 1788 and some of the other maybe prior deals you've done in the breast space. Thanks for taking the question.

Certainly. Women's health and urology is an important focus for us. The endoscopy team is enthusiastic about MOLLI, which helps localize lesions that need to be surgically removed. For surgeries, we have NOVADAQ, the Exoscope from our Invuity acquisition, and the PhotonBlade. These tools allow us to perform single-stage procedures by assessing tissue health and ensuring accurate localization. Our representatives are already involved in the process, making this a great fit for Stryker. While this product may not generate significant revenue currently, it is elegant, user-friendly, and an excellent addition to our offerings. We've been monitoring other products in this field, but MOLLI is the one we've prioritized, and we're thrilled to have it as part of Stryker, which will strengthen our presence in breast care.

Our final question comes from the line of David Roman with Goldman Sachs. Your line is now open. Please go ahead.

Thanks, and good afternoon. Kevin, I wanted to follow up on a comment you just made about capacity in the hospital and the prioritization around certainly whether it's acuity cases or other dynamics influencing how hospitals are managing capacity constraints in their surgical suites. How should we think about that as a potential long-term or even intermediate-term tailwind to your MedSurg business?

It's a great question. The demand for capital is indeed very high. Hospitals and ASCs are being built, and patients are experiencing excellent outcomes. The ASC model is playing a key role here, as patients can go home the same day and return to their favorite activities quickly. This positive experience is spreading, which is increasing demand. Additionally, as operating room capacity expands, there is a push for more procedures to be performed. This is contributing to the elevated number of procedures we're seeing. In our MedSurg business, much of our smaller capital equipment needs replacement, which explains the high growth we're experiencing. Looking at our instruments and power tools, we're seeing substantial growth and a positive outlook ahead. I hope this trend continues, and we expect to see it persist at least through the end of this year. We'll provide guidance for next year in January.

Got it. And then maybe just a follow-up for Glenn and maybe Jason. Regarding the P&L, on the last call, you laid out a path indicating that more of the operating margin expansion moving forward would come from gross margins rather than operating expenses. You also mentioned that in the second half of the year, we would see more leverage in SG&A. How should we consider the interactions between different line items in the P&L now that MedSurg is becoming a larger portion of the total, and how does that affect our perspective on the various factors driving operating margin expansion?

Yeah. Hi, David. I think, though, as I think back to how we have characterized it, if you think about what we did in 2023 that had more gross margin expansion and op margin. And we've always said that 2024 would lean more to sort of SG&A and leverage of op expenses. So I don't think we've really sort of changed sort of how we think about how the year is going to play out for op margin expansion. So I do think that we are bullish on opportunities in gross margin, but a lot of those are things you do this year that are going to benefit us in 2025. On SG&A, that's more near-term things that we have that we budgeted for and planned for that I think actually will allow us to give us a lot of confidence to say that we will get to that 100 basis points of op margin expansion.

Got it. Okay. Thank you for the clarification.

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

This concludes the second quarter 2024 Stryker earnings call. You may now disconnect.