Earnings Call Transcript - SYK Q2 2025

Operator, Operator

Welcome to the Second Quarter 2025 Stryker Earnings Call. My name is Megan, and I'll be your operator for today's call. 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, Chair and Chief Executive Officer. You may proceed, sir.

Kevin A. Lobo, CEO

Welcome to Stryker's Second Quarter Earnings Call. Joining me today are Preston Wells, Stryker's CFO; and Jason Beach, Vice President of Finance and Investor Relations. For today's call, I'll provide opening comments, followed by Jason with the trends we saw during the quarter and some product updates. Preston will then provide additional details regarding our quarterly results and guidance before opening the call to Q&A. Our second quarter results reflect being in diverse and attractive end markets, our focus on innovation and disciplined operational execution. We delivered double-digit organic sales growth of 10.2% and adjusted EPS growth of 11.4% while managing through the impacts of tariffs, NRE dilution and the spinal implant divestiture. Our robust organic sales growth was driven by strong demand across our product portfolio and included double-digit growth from MedSurg and Neurotechnology and high single-digit growth from orthopedics. Geographically, our U.S. organic sales growth of 11.5% included double-digit organic growth from our Endoscopy, neurocranial, Trauma and extremities and instruments businesses and high single-digit organic growth in Medical and hips. We delivered 6.5% organic international sales growth despite supply chain challenges with notable contributions from South Korea and emerging markets. We continue to view international markets as a big opportunity for future growth. As a growth company, we are excited to continue delivering innovation, both internally and through M&A. We maintain a healthy deal pipeline and are well prepared to capitalize on a broad range of opportunities. We exited Q2 with strong momentum and are well positioned for the second half of the year. As a result, we are raising our full year 2025 outlook, which includes delivering another 100 basis points of adjusted operating margin expansion. We are confident in the durability of our growth and earnings power across our businesses. With that, I will now turn the call over to Jason.

Jason Beach, Vice President of Finance and Investor Relations

Thanks, Kevin. My comments today will focus on providing an update on the current environment, capital demand and the integration of Inari Medical. Procedural volumes remained healthy in the second quarter, driven by the continued adoption of robotic-assisted surgery, a stable pricing environment, favorable demographic trends and the ongoing shift toward ASCs. We anticipate continued strength in procedural volumes as we move into the second half of the year. Demand for our capital products was strong once again in the quarter, and we exited Q2 with an elevated backlog. With healthy hospital CapEx budgets, we expect continued strength in our order book for the remainder of the year. We are also excited to share that during the quarter, we reached a milestone of 2 million robotic procedures performed with Mako. We are the clear leader in orthopedic robotics and continue to launch new applications such as revision hip, which is receiving very positive surgeon feedback. Also, we delivered our best ever Q2 for Mako installations, both in the U.S. and worldwide with high utilization rates across the globe. We expect sustained momentum from installations and utilization to continue to drive growth in our hips and knees businesses. The launches of Mako Spine and shoulder are going well and remain on track for full launches as discussed on our last earnings call. Our platform launches such as LIFEPAK 35 and the Pangea plating system continue to have success in the marketplace and are driving meaningful contributions to growth. We recently received approval for LIFEPAK 35 in Europe and are on track to launch in late Q3. As a reminder, many of our new products are still pending approval in Europe, such as Insignia and Pangea. In addition to these launches over the past several quarters, we have introduced a number of next-generation and innovative products across our diverse businesses that continue to drive our growth. Lastly, we continue to make solid progress on the integration of NRE. We did experience some disruption in Q2, including working through destocking over the first half of the year as well as the onboarding of new sales professionals. We have moved quickly to convert the business to our Stryker offense, which will position us well for the future. Even as we navigate these changes, we still expect double-digit pro forma revenue growth for 2025. With that, I will now turn the call over to Preston.

Preston Wells, CFO

Thanks, Jason. Today, I will focus my comments on our second quarter financial results and related drivers. Our detailed financial results have been provided in today's press release. Organic sales growth was 10.2% for the quarter compared to 9% in the second quarter of 2024. This quarter had the same number of selling days as 2024. Pricing had a 0.5% favorable impact with both our MedSurg and Neurotechnology and Orthopedics segments continuing to see overall positive trends from our pricing initiatives. Additionally, foreign currency had a 0.8% favorable impact on sales. Our adjusted earnings per share of $3.13 was up 11.4% from the same quarter last year, driven by our robust sales growth and margin expansion, partially offset by higher interest expense. Foreign currency translation had a favorable impact of $0.04. Now I will provide some highlights around our quarterly segment performance. In the quarter, MedSurg and Neurotechnology had organic sales growth of 11%, which included 12.5% of U.S. organic growth and 5.7% of international organic growth. Instruments had U.S. organic sales growth of 10.1%, led by double-digit performance from our Surgical Technologies business, which includes our Neptune Waste Management and smoke evacuation products. The number of states that have passed smoke-free legislation continues to rise with 19 states to date having approved smoke-free operating rooms. These states represent over half the national population. Endoscopy had U.S. organic sales growth of 18.6%, with strong double-digit performances across all businesses. Growth was fueled by robust demand for operating room infrastructure and renovations and the continued success of the 1788 video platform as well as our Sports Medicine business, which has expanded its portfolio through the launch of several new shoulder products. Medical had U.S. organic sales growth of 9.9%, led by double-digit performance in the acute care business, somewhat offset by lower sales in the emergency care business due to the continuing supply disruptions that are now expected to linger through the end of the year. From a product perspective, these supply matters do not affect overall for LIFEPAK 35. Vascular had U.S. organic sales growth of 1.4%. We expect improved growth in the second half of this year, led by recent launches of our SURPASS Elite Flow diverting stent, ACE LIFT intracranial-based catheter and Broadway large bore aspiration catheter. As a reminder, organic sales figures do not include Inari. And finally, neurocranial had U.S. organic sales growth of 14.8%, led by strong double-digit growth in our neurosurgical and IVS businesses and near double-digit growth in our cranial maxillofacial business. Internationally, MedSurg and Neurotechnologies organic sales growth was 5.7% despite the supply disruptions in Medical mentioned earlier. Growth was led by our neurocranial, instruments, endoscopy and vascular businesses. Geographically, this included strong performances in South Korea, Canada and our emerging markets. Orthopedics had organic sales growth of 9%, which included organic growth of 9.7% in the U.S. and 7.5% internationally. Our U.S. knee business grew 6.2% organically, reflecting our market-leading position in robotic-assisted knee procedures and continued momentum from new Mako installations. Our U.S. hips business grew 8.4% organically, reflecting the ongoing success of our Insignia Hip Stem and the continued adoption of our Mako robotic hip platform. Our U.S. Trauma and Extremities business grew 13.6% organically with double-digit sales growth in our core trauma and upper extremities businesses. Our core trauma performance continues to be driven by Pangea, our differentiated plating portfolio, which also hit its 1-year anniversary of launch in the quarter and continues to generate robust interest and adoption by the market. Our U.S. other ortho business grew 5.6% organically, led by strength of Mako installations and a strong performance in navigational technology products, offset by bone cement. Internationally, Orthopedics organic growth of 7.5% included strong performances in South Korea, Japan and many of our emerging markets. Additionally, our international results do include a nominal amount of spinal implant revenue because of previously accepted tenders that we are fulfilling before exiting those markets. Now I will focus on certain operating and nonoperating highlights in the first quarter. Our adjusted gross margin of 65.4% was favorable by 120 basis points over the second quarter of 2024 despite the impact of tariffs. The improvement was primarily driven by cost improvements and business mix. Our adjusted operating margin was 25.7% of sales, which was 110 basis points favorable to the second quarter of 2024, driven by the gross margin favorability I just discussed. Adjusted operating expenses as a percentage of sales were consistent with prior year. Adjusted other income and expense of $106 million for the quarter was $52 million higher than 2024 due to the increased interest expense from our September 2024 and January 2025 debt issuances, slightly offset by favorable foreign exchange impacts. For 2025, we continue to expect our full year adjusted other income and expense to be approximately $430 million. The second quarter had an adjusted effective tax rate of 15.9%, reflecting the impact of geographic mix and certain discrete tax items. For 2025, we continue to expect our full year effective tax rate to be in the range of 15% to 16%. Turning to cash flow. Our year-to-date cash from operations was $1.4 billion, driven by higher net earnings and year-over-year working capital improvements. And now I will discuss our full year 2025 guidance. Considering our year-to-date results, strong demand for our products and our operational momentum, we're raising our full year guidance and now expect organic net sales growth of 9.5% to 10% and adjusted earnings per share to be in the range of $13.40 to $13.60. Our updated sales guidance includes a modestly favorable pricing impact. In addition, foreign exchange is expected to have a slightly positive impact on both sales and earnings per share should rates hold near current levels. We now estimate a net impact from tariffs of approximately $175 million in 2025. This estimate, which is consistent with the amounts we have previously discussed, does reflect the reduction in the bilateral U.S.- China tariff rates and the announcement of a new framework agreement with the European Union. We continue to take thoughtful measures to address this estimated impact, which we are offsetting through our continued sales momentum, the leveraging of our manufacturing footprint, disciplined cost management and better-than-expected foreign currency impacts. And with that, I will now open up the call for Q&A.

Operator, Operator

Our first question will come from Larry Biegelsen with Wells Fargo.

Lawrence H. Biegelsen, Analyst

Congrats on a nice quarter here. Kevin, there's a lot of uncertainty in the market right now. What's giving you the confidence to raise both your organic growth and your EPS guidance? And how much did the supply issue impact growth this quarter? And when exactly do you expect to resolve the issue? And I had one follow-up, please.

Kevin A. Lobo, CEO

Yes, thanks. I would say what Jason mentioned about procedural strength is accurate. We've observed continued procedural strength in July, which includes both implants and other procedures in the surgical field. There is strong demand for capital, and our order book remains healthy. We haven't experienced any slowdown in capital. The supply challenges are primarily limited to medical supplies, but the rest of our supply chain is performing well. While these issues may persist throughout the year, the medical division continues to sell various products effectively, including LIFEPAK 35, which has recently received European approval. You can expect to see that in Q4. Overall, there's robust demand across our portfolio for procedures and capital, which is why we've raised our guidance. We're very confident about our top line outlook.

Lawrence H. Biegelsen, Analyst

That's very helpful. And Kevin, remanufactured instruments are a hot topic again. You have unique insight to this with the sustainability business. How are you thinking about remanufactured instruments for soft tissue robotics? Do you see that as a good opportunity for Stryker? And if so, how would you enter the market?

Kevin A. Lobo, CEO

Yes. Thanks. Larry, we don't really talk about our pipeline, and this would be a pipeline product. And so there is another company that's obviously getting into the business. And if we decide to enter that, we'll let you know when we do.

Operator, Operator

Our next question will come from Robbie Marcus with JPMorgan.

Robert Justin Marcus, Analyst

Congrats on a nice quarter. Maybe first one, Preston, impressive margins here in the quarter, the EPS guide is now basically back to where it was almost pre-tariff, pre-NRE dilution. Maybe just walk us through what's driving the strength in the underlying margins here that get you almost back to the original guidance, especially as you're absorbing all of these dilutive pressures?

Preston Wells, CFO

Yes. Thanks for the question, Robbie. So a few things. I guess, first, I'd point to, we started as we came through the pandemic several years ago, really a focus on price. And so that focus on price has continued. And so we're seeing the benefits of that flowing down and really helping us to drive margin. In addition, and we've talked about this continued focus on our manufacturing efficiency and really getting our operations into a more efficient manner in terms of supporting the sales growth that we have. And so we're really starting to see that take shape as well. We have a lot of different initiatives going on from different lean initiatives in our manufacturing facilities to different initiatives happening across our procurement organization as we think about how we source product, where we source product. And so all of those are certainly helping us to drive the additional margin improvements that you're seeing. I think we're also just getting more efficient with where we have product and how we're moving product through our supply chain, which is leading to some reduced costs as well. And then finally, I would just point to, we continue to look at how we support the business from an OpEx standpoint, really thinking about G&A as we look at shared service centers and other areas like that as we continue to support the business. The good news, Robbie, is, and I'm really pleased with in the first quarter, we saw a consistent delivery of that op margin. So 100 basis points in the first quarter, 100 basis points in the second quarter, which is really helping us to be much more consistent as we drive to the number that Kevin was talking about our overall 100 basis points of delivery for the year. So all these elements that we've been putting in place over the last few years are really starting to take shape and allowing us to drive a more consistent margin story.

Robert Justin Marcus, Analyst

Great. Maybe a follow-up. Kevin, in the outpatient rule, we saw a proposal to move heart ablation into the ASC for the first time. I know you love seeing construction cranes. I was wondering if I could get your thoughts on where we are in the ASC build out? I know most people are focused on orthopedics with respect to Stryker, but how are you thinking about ASCs across other parts of the hospital and Stryker's role in it?

Kevin A. Lobo, CEO

Yes, I don't anticipate any slowdown in the ASC trend. We initially observed this with sports medicine and foot and ankle procedures, and it has expanded to hips and knees. This trend will extend to areas like cardiology and general surgery, with many elective procedures being performed in ASCs. It won't stop because it reduces healthcare costs and provides a positive experience for both surgeons and patients. Healthy patients prefer ASCs since they don't encounter sick individuals there. I definitely see this trend continuing. For example, we recently experienced significant reimbursement increases for total ankle procedures, both in hospital outpatient settings and ASCs. Five years ago, I was uncertain if we would be doing total ankles in ASCs, but now the reimbursement has increased by $7,000 because fusions are less successful than total ankle procedures. This trend is clearly here to stay, and I believe it will be evident across all specialties. We appreciate the construction aspect, as we have numerous products, even in areas we don't directly participate in, providing substantial infrastructure used in other specialties.

Operator, Operator

Our next question will come from Ryan Zinnerman with BTIG.

Ryan Benjamin Zimmerman, Analyst

Preston, last quarter, I think you called out the tariff impact at about $200 million. And if I heard you correctly, it's $175 million now, most companies we've seen have come down maybe by about half. I'm just wondering if you could elaborate on why it's only coming down by about $25 million? Is that a reflection of some of the manufacturing locations and so forth? Comment on that.

Preston Wells, CFO

Thanks for the question. You're right. Last quarter, we estimated the tariff impact at $200 million, and now it's around $175 million. A few points to consider: our original estimate was based on what we had at the time, which included a baseline of 10% for most areas, except for certain specific industries like steel and aluminum, and different rates for Canada, China, and Mexico at that point. Moving into the second quarter, the significant changes we've observed include the bilateral agreement between the U.S. and China, which has notably reduced that tariff. This reduction positively impacted our estimate. However, we also saw an increase as Europe moved to a 15% tariff, up from the previous 10%. These dynamics are resulting in a mixed impact, which brings us to the current figure. It also reflects the way our manufacturing operations are structured.

Kevin A. Lobo, CEO

Yes. It's our manufacturing footprint in Europe as well as us not being as strong in China as other companies. So that's why it affects us maybe to a little bit of a lesser degree than others.

Operator, Operator

Our next question will come from Joanne Wuensch with Citibank.

Joanne Karen Wuensch, Analyst

I have 2. One of them, the supply issue that you're talking about in MedSurg, could you remind us, please, how long it is going to take to resolve that? And then I'll put my second question right upfront. You launched a new Mako device. I think it was Gen 4 in the spring at AAOS, which had the shoulder or the hip and the knee and the spine applications altogether. How is that going? And anything you'd say on shoulder and spine would be great.

Jason Beach, Vice President of Finance and Investor Relations

Joanne, I'll take the first part of this, Joanne, as it relates to the supply issues and then Kevin can jump in here on Mako. But as it relates to the supply issue, and I think Preston touched on this as well. Largely in the Medical division, we do expect it will kind of linger throughout the remainder of the year. That being said, I think what you'll see of medical in the back half of the year, growth will accelerate and double digit in terms of organic sales growth for them well within reach as we think about the full year.

Kevin A. Lobo, CEO

Yes, we're really excited about the launch of Mako 4, although it's not yet a global launch. We still have countries where we're selling Mako 3. Mako 4 includes the hip revision application, which is exclusive to it, while the spine application is also only available on Mako. Currently, we have a limited launch for the shoulder on Mako 3, and we are in the process of migrating it to Mako 4, which will be available at the beginning of next year. Part of the reason the shoulder launch will not be fully rolled out until next year is because we want it to coincide with Mako 4. So far, the feedback has been very positive. We haven't done a full launch on the spine yet for similar reasons, as we are still refining the workflow and gathering feedback. We also need to collaborate with VB Spine to finalize these deals, which involve both the robot and the implants. We're working through the necessary commercial contracts and processes, and everything is looking very promising. The applications have been well received by customers, but we don't anticipate a significant impact on our sales this year; however, we expect to see a much larger impact next year.

Operator, Operator

Our next question will come from Travis Steed with Bank of America.

Travis Lee Steed, Analyst

And a question on NRE. I don't know if you could maybe help with how the business grew this quarter with the destock and Tele transitions and what gives confidence in double-digit growth in 2025? And then can you get back to kind of market growth rate in 2026?

Kevin A. Lobo, CEO

Yes, destocking isn't easy. We've experienced this before, especially after acquiring companies like K2M. Many of these early-stage companies had practices such as quarterly incentives to drive inventory levels, which we have eliminated. We have appointed a sales leader from Stryker and a new marketing leader from Stryker as well. Our President also comes from Stryker and has experience in the peripheral vascular space. This Stryker leadership team brings excitement to our operations. We also made a bold decision to have all sales representatives outside of California sign non-compete agreements, despite some pushback. We accepted the challenges that came with this, and we've been actively hiring new sales staff. The positive aspect is that the underlying procedural demand was in double digits. Our procedures and the surgeons using our products are performing well in the market, so we are in a solid position regarding procedures, and we expect to clear out the excess inventory soon. Thus, we aren't overly concerned. In fact, we anticipate a strong second half of the year, aiming for double-digit growth overall. Most of the difficult adjustments have already been addressed, though there may still be some inventory to resolve. Overall, we're preparing for future success. From past experiences, we've learned that addressing issues early in these types of transactions is beneficial. I'm excited about our pipeline; I recently visited Inari again, and their pipeline is impressive. The talent is excellent, and we've integrated them into a Stryker sales strategy with Stryker leadership. We're skilled in this area, as they've pioneered this market and have significant clinical trials underway. Internationally, they're still quite small, presenting a vast opportunity to utilize our infrastructure. Overall, I'm very pleased to have Inari as part of the Stryker portfolio, and I foresee positive developments, starting in the latter half of this year and continuing into 2026 and 2027.

Travis Lee Steed, Analyst

Great. And then maybe the follow-up question. There's some stuff in D.C. and Medicaid exchange cuts. I don't know how you're thinking about if there's any potential impact on that on the elective procedures? And like the knee business did dealt a lit bit this quarter. I hear you on the strong volumes, but I think there was some stuff international like slowdown in U.S. and international needs. I don't know if there's anything to kind of call out that was onetime in OUS needs this quarter.

Jason Beach, Vice President of Finance and Investor Relations

Yes, it sounds like a couple of questions there, Travis, but I'll take it. This is Jason. So first off, on the bill side of this, as you can imagine, we are continuing to monitor the situation. As you think about procedures for us that involve Medicaid, it's really an immaterial amount of procedures for us. So really knowing what we know today, no concerns there for us as we think about the bill. But again, we'll continue to monitor that. On the knee front, I'll say a couple of different things. So as you think about how we exited Q2, June can be with vacations and some of those things, a little bit of a slower month. We saw a little bit of that. I'll tell you as we went into July off to a really nice start for the quarter. So overall, I would say no concerns about the knee market. We continue to think this will be kind of a mid-single-digit market with us growing above market, obviously. And then just the last thing I would say, it's 1 quarter, right? So you see some of these fluctuations as you go throughout the year. But overall, I feel really good about the year.

Operator, Operator

Our next question will come from David Roman with Goldman Sachs.

Unidentified Analyst, Analyst

This is Jenny Benoit on for David. You probably have the international expansion opportunity for a few quarters. And the Pangea and Signal launching in Europe. I was hoping you could break down how you're thinking about inorganic versus organic investment, especially as it relates to international and expansion in new countries? Thinking also here, any reflections on surface, you kind of anniversary the acquisition and expansion for Orthex in Europe?

Kevin A. Lobo, CEO

Yes. Thanks for the question. So Surf has gone extremely well. We're really, really pleased. You can see our hip business has done very well internationally. And yes, it laps and it's now going to become part of organic. And in fact, we're actually going to be bringing our first Surf product to the United States shortly. So very pleased with that acquisition and integration. We haven't done a lot of deals like that, that are primarily revenue based outside the United States. We continue to look for those types of opportunities. I would tell you that the biggest opportunity, frankly, is increasing the penetration of products we already have in our portfolio internationally and especially acquisitions that primarily have U.S. revenue, taking those acquisitions to the international markets such as Inari. So obviously, this quarter, international was a little bit slower than it's been over the past 3 or 4 years, but nothing alarming there. Pangea, just to be clear, is not yet approved. So that probably won't be approved until next year. And Insignia is still not approved. The only one that just got approved was LIFEPAK 35. So unfortunately, this EU MDR has been a real challenge, not just for Stryker, but for the whole industry, a much slower regulatory pathway for products. And so a lot of the super cycle launches that we're enjoying in the United States are still not arrived in many other international markets. In some cases, we're launching in Japan before Europe, which was unheard of 3 or 4 or 5 years ago prior to EU MDR. So I think this slight slowdown here, it's still a good growth rate. When you're above 6% growth, that's still pretty good, but not what we're accustomed to. We do expect to get back in the second half of this year. International growth will be much better than it was in the second quarter.

Operator, Operator

Our next question will come from Pito Chickering with Deutsche Bank.

Philip Chickering, Analyst

So 2 questions here. The first 1 is on the guidance raise, really nice rate here. But could you bridge us the EPS increase you saw as it relates to a better price than expected FX to tariffs versus your core operational strength?

Preston Wells, CFO

Yes. So Pito, thanks for the question. We can walk through a little bit. As we think about the guide is really reflective, as Kevin mentioned before, on our strong performance and our expectation really on the top line where we expect to continue for the rest of the year. The bottom part of that and the EPS side of that is really just the flow-through of that upside that we see. As you remember, when we talked about tariffs, part of the way that we're covering off on tariffs is through some spend discipline and some other areas. And so that's not necessarily going to 100% flow through to the bottom line as we're still trying to spend behind our growth initiatives. The other element is really, we do see some favorable FX that does flow through a little bit as well. So really, what you're just seeing is that top-down flow-through from the strong performance that we've had. The other thing I would just point to, we do have a little bit of a wider range on the bottom, and a lot of that just reflects some of the continued uncertainties primarily to do with macroeconomic elements like tariffs. that we know are still going to have some pluses and minuses for the rest of the year.

Philip Chickering, Analyst

Great. And then the follow-up is, I'm telling to understand the 19% growth you saw in Endo in the U.S. this quarter, up quite a bit versus first quarter. Comps were easier, but still a pretty big move up. Are there any reclassifications skewing that number? Or if not, can you just walk us through kind of that great growth?

Kevin A. Lobo, CEO

Yes. First thing I'd say, no reclassifications, no accounting issues whatsoever. Just pure fantastic performance from the Endoscopy division. And look at last year, it was an 8% comp. So it wasn't exactly soft. But yes, it was a little bit lower than the typical double digit, but it was a boomer of a quarter for our Endoscopy division, and it was really across the portfolio. So the booms and lights in our communications business had a phenomenal quarter. And they have great orders. They have the new Oculon Light that they've launched, which has tremendous demand. So communications will continue to hum the rest of this year. And then, of course, 1788 and the what we call the Endoscopy business unit had a terrific quarter, and that's just been a consistent trend that we've had. And then Sports Medicine is just on fire. And you're talking about very strong double-digit growth. They've launched about 6 shoulder products over the past, let's call it, 6 to 8 months. And those products, that shoulder was the one area we were not quite as strong as hip and knee in sports medicine, and they had an absolute boomer. So you had sort of all the business units kind of clicking at the same time. We also have our reprocessing business. That's part of the endoscopy. They also had a solid quarter as well. So really one of those quarters where kind of everything caught fire. But this is a division that's been performing very consistently, very high growth quarter after quarter after quarter, just a little bit higher than normal, let's say, this quarter, which, of course, we enjoy.

Operator, Operator

Next question will come from Matthew O'Brien with Piper Sandler.

Matthew Oliver O'Brien, Analyst

I'd love to talk a little bit about Mako again. Just the commentary about record new system adds is great to hear again. But I mean, you've been doing that for a while. Anything you can call out as far as what's driving that again here? I know it's Q2, but is it having the shoulder application, the spine application where people are interested? Or is there any kind of pause around competitive launches? Just anything to call out there because, again, you continue to put up these Mako numbers quarter after quarter.

Kevin A. Lobo, CEO

I was very pleased with this quarter, which marks the first quarter for the new Mako, Mako 4. I was uncertain whether introducing a new robot would lead to some hesitation, but that has not been the case at all. Our team is executing well, and the robot is performing exceptionally. The news about our fantastic robot is spreading. Surgeons are excited about the revision hip, as it simplifies a challenging procedure by allowing precise placement of screws in the bone. Helping surgeons with difficult tasks is well-received. I was pleasantly surprised by the performance during this transition, especially since we have not previously changed a cycle in Mako like we have in cameras and power tools. The transition in the United States has gone seamlessly. Customers are eager for their next robot, and some hospitals are even asking if they can upgrade from a 3 to a 4. We are having discussions about upgrades and will support our customers in transitioning to the new robot. Many customers have decided to keep their current units while purchasing additional systems for other operating rooms. We expect this trend to continue, and we have a clear visibility into future demand. There are still many operating rooms without robots, which presents additional opportunities.

Matthew Stephan Miksic, Analyst

Got it. I appreciate that. And then as a follow-up, Kevin, you're pretty transparent as far as just the thoughts on your M&A strategy and you're talking about a full pipeline. Should we expect another sizable type transaction, maybe not quite as big as Inari for you guys in the near future, somewhat in the near future? And you've also given us kind of some of the areas that you're interested in. Anything else that you would kind of highlight that might be new to that list or something else that you're really a little more focused. I don't know if it's soft tissue robots, et cetera.

Kevin A. Lobo, CEO

Yes, there has been no change to our focus areas, which remain consistent with what I've previously mentioned. With Inari now part of our portfolio, if we proceed with another deal in the peripheral vascular space, it won't be classified as just an adjacency; it will be more of an integration. So please don't assume that the peripheral deal is our only option. We generally seek to expand within a space once we enter it. We have a pipeline of potential deals that the team was previously examining, and we are set to begin our evaluation process. I believe we have the financial capacity for a deal similar in size to Inari, but timing for such deals is uncertain and unpredictable. Most of our transactions will continue to be smaller tuck-in deals. Last year, we completed seven deals in line with our usual strategy, and occasionally we pursue larger transactions like Wright Medical or Inari. I can't provide further specifics at this point, but we are consistently exploring opportunities. Our teams are actively searching the market and we have a solid pipeline along with several letters of intent underway, though these can sometimes fall through depending on pricing and due diligence. While it's difficult to predict exact outcomes, I would be surprised if we don't announce a deal or two, or even three, by the end of the year. Most will likely be tuck-in deals, but pursuing something larger remains a possibility. We certainly have the financial capability, and I tend to be proactive about investments. We will remain active in the M&A landscape.

Operator, Operator

Out next question comes from Vijay Kumar with Evercore.

Vijay Muniyappa Kumar, Analyst

Congrats on a nice quarter, Kevin. Maybe 2 product segment kind of questions. First on medical is there a 1 excluding a little bit, obviously, questions around the CapEx environment. So maybe if you could just period by the broader CapEx environment in LIFEPAK 35 launch and how that's progressing?

Jason Beach, Vice President of Finance and Investor Relations

Yes, Vijay, this is Jason. I think I got most of your question there, so I'll take a run at it here. But I think the question is on the capital environment. I would say, and similar to my prepared remarks here, we feel really good about the capital environment. If you look at our capital backlog, again, it remains very elevated. No signs of slowdown there as we think about the rest of the year. So we're really confident in that business for sure.

Kevin A. Lobo, CEO

Yes, the LIFEPAK 35 is performing exceptionally well, with a strong order book. We are still awaiting certain approvals, but obtaining European approval is a significant step forward. In September, we plan to launch the LP-35 in Europe, and we have received fantastic customer feedback. This product is unique compared to cameras or power tools, as it will continue to be discussed as a new product for years to come. Medical products typically have longer growth cycles, and they contribute to growth for a more extended period. ProCuity also had a very successful Q2, demonstrating that these long-term product cycles will continue to provide advantages for a long time.

Vijay Muniyappa Kumar, Analyst

That's helpful, Kevin. Can you provide some insight on the knee performance? Were we comparing this quarter to the previous one, or is there anything else impacting the results?

Jason Beach, Vice President of Finance and Investor Relations

No, I wouldn't say there's anything else material to call out other than what I've already said. Again, feel really good about the knee market, feel good about the full year. And like I said earlier, July off to a good start here. So really nothing additional to that.

Operator, Operator

Our next question comes from Matt Miksic with Barclays.

Matthew Stephan Miksic, Analyst

So I wanted to follow up on Interventional spine. Just the launch of OptaBlate, the investments that you've made in that segment. It would be great if you could talk a little bit about any of the quantitative or qualitative metrics about the launch so far, the other products the investments that you're making and the growth? And then I had one follow-up.

Kevin A. Lobo, CEO

Yes, we are very enthusiastic about our Interventional Spine business, which is categorized under neurocranial. Over the past three to four years, it has been one of the fastest-growing segments within Stryker. We have enhanced this growth with the launch of OptaBlate, starting with the organic launch and now introducing OptaBlate-BVN. Last year, we also acquired Vertos, which hasn’t yet contributed to organic sales growth, but that will change later this year. This business is performing exceptionally well, led by a fantastic management team. We’ve had great success with our balloons initially, thanks to the CareFusion acquisition and the curve balloon. After our SpineJack deal, we are now equipped with OptaBlate, addressing both oncology and pain, and we are actively expanding our sales team. This segment is like a hidden gem; it's not large yet, but it is rapidly growing. It represents a key part of our strategy for consistent high growth, demonstrated by strong double-digit growth rates in our smaller business units. I believe this momentum will continue, especially with Vertos starting off strongly and early feedback on BVN being very positive.

Matthew Stephan Miksic, Analyst

That's great. That's great. Then a follow-up just on the sort of pull word bingo here. But AI is something that we haven't talked about in a while. I know Robert, I'm sure breaks up every day thinking about it, and probably go please working on it. But maybe talk a little bit about some of the digital efforts that you have underway around whether it's orthopedics or other segments of the business? And where we might start to see more of Stryker putting its substantial data and assets in digital technologies to work to deliver solutions in that area?

Kevin A. Lobo, CEO

Thanks. There's a lot happening in the AI space. Blueprint has received FDA approval and utilizes AI to develop surgical plans and guide surgeons on the appropriate implants. We will continue to focus on preplanning and expand this across our portfolio as a key opportunity. Our gout surgical product, which quantifies hemoglobin, has also been approved as an AI solution. We have several additional projects in progress. Moreover, we've recently appointed Deborah King as our new Chief Digital and Information Officer. She brings extensive experience in degenerative AI and will help enhance our infrastructure for divisional use. This topic will likely feature prominently in our upcoming Investor Day, and we will announce the exact date shortly. Instead of using this earnings call to delve into the details, we plan to provide more comprehensive information later this year. In summary, we are determinedly pursuing advances in this area, viewing it as a significant opportunity to integrate more scientific data into healthcare, moving beyond solely relying on a surgeon's experience. We have numerous projects in the pipeline and will update you further soon.

Operator, Operator

Next question will come from Steve Lichtman with Oppenheimer & Company.

Steven Michael Lichtman, Analyst

Have you discussed the Salesforce transition at Inari since implementing noncompete agreements? Can you provide insights into the anticipated impact on sales? You mentioned continuing double-digit growth, but has there been any change in the expected revenue contribution?

Kevin A. Lobo, CEO

Yes. Look, for the full year, I think we talked about something like $590 million for the full year. We're going to be right around that number. So we are absorbing these changes, these challenges of sales rep attrition. It was starting to happen even before the deal closed, and we accelerated that with the noncompetes. And look, a lot of those people that decided not to sign on were not necessarily all regrettable, not necessarily Stryker type of salespeople. We've been aggressively hiring. So no, we're not calling down our number, but it's a little bumpier, so it was a little lower as we destocked and as we dealt with the turnover, but the reps are coming on, and we're going to expect very good numbers in Q3 and Q4.

Jason Beach, Vice President of Finance and Investor Relations

Yes. Steve, maybe just to add just a finer point on that on the $590 just to be crystal clear here. That would be for the 10-month period since we've owned them.

Operator, Operator

Yes. Our next question will come from Caitlin Cronin with Canaccord.

Caitlin Cronin, Analyst

Congrats on a great quarter. I guess, just starting off with Hips, I think it was a strong number. Are you guys seeing any pressure from the competitor launches in hips? And then just any update on whether you're continuing to trend higher and kind of the percentage if procedures done robotically?

Kevin A. Lobo, CEO

Yes. I would say on robotic procedures trending, both knees and hips continue to climb. And we're very excited about the Hip 4.0 software because if you recall, the first 5 or 6 years, maybe 7 years after the acquisition, the hip percentage hasn't really changed very much. But this new software is very good. And especially now that we've added revision hip, I expect that to continue to improve. Insignia has been an absolute home run of a product for us and has really taken off, and I can't wait until for it to get approved in Europe. So that will continue to contribute to our growth. We've done a lot of training around direct interior, which has been terrific. And so overall, we run a really good offense in terms of our commercial offense. And we just focus more on ourselves and what we're doing with the customers rather than focusing on competition, and that's been paying off for us.

Operator, Operator

Next question will come from Josh Jennings of TD Cohen.

Unidentified Analyst, Analyst

This is Eric on for Josh. On capital, I understand you guys bucket items into large and capital items. For large items in particular, I was wondering if there's any detail you can share on the portion of outright capital sales versus financing options or placements for that category. And maybe an easier 1 to answer is just whether or not that has seen any meaningful shift in the ratio over the past several quarters.

Jason Beach, Vice President of Finance and Investor Relations

Yes, this is Jason. I'll address this. When considering our capital as a percentage of total revenue, approximately 15% comes from smaller capital that is more directly linked to procedures. The larger capital constitutes about 9% to 10% of total revenue, and that segment continues to perform exceptionally well. As Kevin noted earlier, our communications business, which represents a significant portion of our larger capital, had a strong quarter, and other areas with larger capital are also doing very well. We are pleased with both our large and small capital. The only noticeable trend towards increased financing has been with the robots under Mako, particularly in ambulatory surgery centers where most transactions are financed, unlike hospitals which traditionally purchase outright. However, there hasn't been a significant change in this trend compared to what we have observed over the last year to 18 months.

Operator, Operator

Yes. Our next question will come from Unidentified Analyst.

Unidentified Analyst, Analyst

I appreciate the reiteration of the U.S. launch timeline there, but I was just curious if you could share your thinking around those new offerings in international markets and what the commercial opportunity could look like outside the U.S.?

Jason Beach, Vice President of Finance and Investor Relations

Yes. I would say the opportunity is large, right? And as you think about just the initial launch, we're looking at the end of this year for Mako Spine and then the first part of next year for Mako shoulders. So it will be a deliberate lengthy launch. But yes, there's lots of opportunity both in the U.S. and outside.

Operator, Operator

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

Kevin A. Lobo, CEO

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

Operator, Operator

This concludes the second quarter 2025 Stryker Earnings Call. You may now disconnect.