Earnings Call Transcript - SYK Q2 2022

Operator, Operator

Welcome to the Second Quarter 2022 Stryker Earnings Call. My name is Hannah and I will 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, our Chair and Chief Executive Officer. You may proceed.

Kevin Lobo, CEO

Welcome to Stryker’s second quarter earnings call. Joining me today are Glenn Boehnlein, Stryker’s CFO; and Jason Beach, Vice President of Investor Relations. For today’s call, I will provide opening comments, followed by Jason with the trends we saw during the quarter and updates on Mako and Vocera. Glenn will then provide additional details regarding our quarterly results before opening the call to Q&A. For the quarter, organic sales growth was 6% with high single-digit growth from our MedSurg and Neurotechnology businesses, led by endoscopy, instruments, and neurocranial. Our hip and knee businesses delivered high single-digit growth in the face of tough compares from 2021. Internationally, we posted high single-digit organic growth with strength in Canada, Europe, and Japan as well as double-digit organic growth in emerging markets despite the China COVID-related slowdowns. During the quarter, we continued to have robust demand for our capital products. However, we had meaningful shipment delays as a result of ongoing product supply challenges mostly affecting our large capital businesses. As a reminder, less than 10% of our revenue is large capital, with about 15% of our revenue being smaller operating capital that drives revenue for hospitals. For the quarter, we delivered adjusted EPS of $2.25 as we faced increasing negative impacts from foreign exchange as well as inflationary pressures and significant premiums on inventory spot buys. We expect these pressures to continue in the back half of the year. However, the supply situation is improving. Given the higher input costs, we have begun to take a series of pricing actions across our portfolio. These will take time to be reflected in our results given the phasing of contract renewals in many areas of our business. We continue to invest in R&D at a healthy ratio of sales, demonstrating our continued focus on new product pipelines. We remain confident in the outlook of our business and expect to continue to deliver sales growth at the high end of med-tech. However, even with disciplined spending, the worsened foreign exchange situation and other pressures will prevent us from delivering leverage to earnings in 2022. With half of the year behind us and a very strong order book, we now expect full year organic sales growth of 8% to 9% and due largely to foreign currency exchange, we now expect adjusted earnings per share to be in the range of $9.30 to $9.50 per share. Overall, our team has shown good resiliency and we are on track for another strong year of sales growth. Our employee engagement remains very high and we continue to win awards as a Great Place to Work, most recently as a Great Place to Work for Millennials by Fortune. We are also gearing up for some exciting new product launches in 2023 and look forward to an improved supply chain picture. Through the many challenges that we have faced since 2020, we feel optimistic about how we are positioning ourselves for the future. I will now turn the call over to Jason.

Jason Beach, Vice President of Investor Relations

Thanks, Kevin. My comments today will focus on providing an update on the current environment, including the procedural and geographic trends during the quarter. In addition, I will provide an update on the integration progress of the Vocera business. Procedural volumes continued to recover throughout the second quarter in most countries. While we are seeing volumes recover, hospital staffing pressures have continued, impacting the ability to reduce procedural backlog in a meaningful way. These challenges will likely continue, meaning the tailwind of pent-up demand will be more moderate but last longer. Geographically, procedural volumes steadily improved during the quarter in the United States, Europe, and Latin America. Procedural trends in parts of Asia and Australia have been more volatile due to ongoing COVID-related impacts. In addition to the continued procedural recovery, we had a strong quarter of Mako installations, up 19% versus 2021. However, as we are balancing customer purchasing preferences, the mix of these deals has resulted in less revenue per quarter. We are pleased with how the growing installation base continues to fuel market-leading implant growth. The order book remains strong for Mako and the percentage of implants using the robot continues to increase. We will update you on our installations and utilization metrics at the end of the year. Demand for our capital products remained very strong in the quarter. While we experienced solid customer order performance from our capital businesses, the sales growth was restricted because of ongoing headwinds, which included raw material shortages, primarily related to electronic components and installation delays in parts of our business due to hospital staffing challenges. The raw material shortages continue to be most impactful in our medical business, both within our acute care and emergency care business units. Based on our current supply outlook, we expect medical to have a strong second half. Now to our key integration activities. We continue to be pleased with the momentum of the Vocera integration. Since acquiring the company, we have seen double-digit growth in the first and second quarter versus the same periods in 2021. We are already starting to realize synergies and remain excited about the potential this product will create for both Stryker and the customers we serve. In summary, while the macroeconomic environment remains volatile, procedural volumes are improving and the underlying demand for our products remains strong, which gives us confidence in our ability to continue to drive strong growth. With that, I will turn the call over to Glenn.

Glenn Boehnlein, CFO

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 6.1% in the quarter. The second quarter’s average selling days were in line with 2021. The impact from pricing in the quarter was unfavorable 1.4%. Foreign currency had a 3% unfavorable impact on sales. Despite a challenging comparable versus 2021, our organic sales growth has been solid and was led by double-digit performances in our Endoscopy and Instruments businesses as well as strong growth in our international businesses. Our sales growth has been somewhat constrained by the continued supply chain challenges and electronic component shortages, especially impacting the capital products in our MedSurg businesses, primarily in our medical business. Our capital order book continues to be very robust as demand from our customers continues to be strong. In the quarter, U.S. organic sales growth was 4.7%. International organic sales growth was 9.7%, impacted by positive sales momentum across most of our international markets, specifically emerging markets, Canada, Japan, and Europe, somewhat offset by lingering COVID impacts in Australia and China. Our adjusted EPS of $2.25 in the quarter was in line with 2021 driven by our sales momentum and favorable adjusted tax rate offset by gross margin challenges and the impact of foreign currency exchange. Our second quarter EPS was negatively impacted by foreign currency exchange of $0.05 versus 2021. Now, I will provide some highlights around our segment performance. In the quarter, MedSurg and Neurotechnology had constant currency sales growth of 10.6%, with organic sales growth of 7.9%, which included 7.2% of U.S. organic growth and 9.9% of international organic growth. Instruments had U.S. organic sales growth of 12.1%, led by double-digit growth in our orthopedic instruments and surgical technology businesses. From a product perspective, sales growth was highlighted by double-digit growth in power tools, surgical account, irrigation, smoke evacuation, and Steri-Shield. Endoscopy had U.S. organic sales growth of 15.4%, reflecting very strong performances across all of their portfolio, including video products and double-digit growth of our communications and sports medicine businesses. Medical, which includes our recently acquired Vocera business, had a U.S. organic sales decline of 2.4% driven by the aforementioned supply chain challenges primarily impacting our emergency care products. Medical sage and acute care businesses boosted double-digit organic growth. During the quarter, we also saw significant growth in orders for our beds and emergency care products driven by very strong customer demand. Our U.S. Neurovascular business posted an organic decline of 1.8% driven by a strong double-digit comparable in 2021 as well as competitive pressures, disruptions due to hospital staffing shortages and softer market conditions in part because of supply shortages of contrast use in procedures. The U.S. neurocranial business posted organic sales growth of 9.4%, which included solid growth in our ENT navigation, balloon dilation, and neuro products. Internationally, MedSurg and Neurotechnology had organic sales growth of 9.9%, reflecting double-digit growth in the endoscopy, neurovascular, and neurocranial businesses, somewhat offset by medical. Geographically, this included strong performances in Japan and emerging markets. Orthopedics and Spine had both constant currency and organic sales growth of 3.9% which included organic growth of 1.6% in the U.S. and 9.5% internationally. This reflects the impact of strong international growth and solid growth in our hip, knee, and extremity businesses. Our U.S. hips business grew 4.5% organically reflecting strong primary hip growth reflected by the recent launch of our Insignia Hip Stem and continued procedural growth. Our U.S. knee business grew 5.3% organically, reflecting our market-leading position in robotic knee procedures. Our U.S. Trauma and Extremities business grew 3.1% organically against a significant comparable in 2021. This growth was led by double-digit growth in our upper extremities, somewhat offset by softness in the trauma market. Our U.S. Spine business declined 3.6% organically, reflecting a slightly slower scoliosis season, partially offset by solid performance in our enabling technology business. Our U.S. Other ortho declined organically by 13.8% primarily driven by the impact related to the aforementioned deal mix changes of Mako installations in the quarter. Internationally, Orthopaedics and Spine grew 9.5% organically, which reflects the strong momentum in Europe as procedural volumes improve as well as strong performances in Japan, Canada, and India somewhat offset by COVID-related volatility in Australia and Korea. Now, I will focus on operating highlights in the second quarter. Our adjusted gross margin of 63.3% was unfavorable, approximately 270 basis points from the second quarter of 2021. Compared to 2021, our gross margin was adversely impacted by the purchases of electronic components at premium prices on the spot market and other inflationary pressures, primarily related to labor, steel, and transportation costs as well as operational efficiencies due to component shortages. We expect these adverse impacts to continue throughout 2022. We expect Q3 gross margin to be similar to Q2. Q4 should see some improvement and the full year gross margin compared to 2021 will be negatively impacted by approximately 200 basis points. Adjusted R&D was 7.2% of sales, which represents a 60 basis point increase from 2021. This reflects our continued commitment to innovation funding and the related future growth that we will provide. Our adjusted SG&A was 32.4% of sales, which was 100 basis points lower than 2021. This reflects continued cost discipline, somewhat offset by the ramping of certain prioritized expenses and hiring that support future growth. In summary, for the quarter, our adjusted operating margin was 23.7% of sales, which was approximately 220 basis points unfavorable to the second quarter of 2021. This performance is primarily driven by the aforementioned inflationary impacts resulting in gross margin challenges and the net negative impact resulting from foreign currency. Adjusted other income and expense decreased from 2021 primarily resulting from an equity investment gain and favorable interest income. We anticipate a normalized run-rate of adjusted OI&E to be approximately $70 million per quarter for the remainder of 2022. Our second quarter had an adjusted effective tax rate of 13.9%, reflecting the impact of geographic mix and certain discrete tax items. We now expect our full year adjusted effective tax rate to be in the range of 14.5% to 15%, which is consistent with the ETR performance we experienced in 2021. Focusing on the balance sheet, we ended the second quarter with $1.1 billion of cash and marketable securities and total debt of $13.4 billion. Approximately $450 million of debt was paid down in the quarter. Turning to cash flow, our year-to-date cash from operations is $732 million. This performance reflects the results of net earnings and continued focus on working capital management, partially offset by the impact of higher costs for certain electronic components and pre-buying certain other critical raw material inventory. Considering our second quarter results, the strong order book for capital equipment and the sales momentum in our implant businesses, we now expect full year 2022 organic sales growth to be in the range of 8% to 9%. This performance assumes that the market environment experienced in Q2 continues to improve throughout the rest of the year with supply chain disruptions easing in the back half of the year. If foreign currency exchange rates hold near current levels, we expect net sales in the full year to be adversely impacted by approximately 2% to 3% and adjusted net earnings per diluted share to be adversely impacted by approximately $0.25 to $0.30 in the full year, which is included in our revised earnings guidance range. Based on our performance in the second quarter, including consideration of the continued supply chain challenges and the inflationary environment, together with our increased sales guidance and continued financial discipline, and most significantly, the anticipated future impact related to foreign currency, we now expect adjusted earnings per share to be in the range of $9.30 to $9.50. The low end of this guidance range assumes that the continued macroeconomic volatility persists, including procedural disruptions and worsening of the electronic component availability. We will continue to evaluate the changing environment and we will provide updates to our guidance as necessary. And now, I will open up the call for Q&A.

Operator, Operator

The first question is from Robbie Marcus with JPMorgan. Please proceed.

Robbie Marcus, Analyst

Maybe I’d start on second half it’s sort of like a tale of two cities where you have this really strong top line and somewhat of a pressured bottom line. And moving organic sales guidance up 100 basis points is great to see, but it does look like roughly two-thirds of EPS down move is currency a little bit from operations. So maybe just walk us through – it sounds like medical is going to get a good chunk better in the second half? Maybe just give us a little color of how you get the confidence to raise the top line and where exactly you are seeing the softening operating margin constant currency?

Kevin Lobo, CEO

Yes. Sure, Robbie. This is Kevin. I’ll take that. So first of all, I feel very good about the momentum that we have across all of our businesses. Medical for sure is going to have a much better second half. They were the division that was most affected by the shortages. We do have a line of sight towards the supply of key electronic components and we are going to ramp up as fast as we can to meet that demand. But we also have softer comps. This second quarter was by far the most difficult comparative from the prior year. So we have softer comps across, frankly, all of our businesses in Q3 and Q4. And the order book, not just for Medical, but if I look at the other MedSurg businesses like Instruments and Endoscopy, which both had terrific Q2s, they are going to continue to have strong growth in Q3, Q4. So, we obviously feel very good about the demand from our hospital customers. That gives us the confidence to raise our sales growth. We exited the first half at 7.5%, with a very tough Q2 comp. So, we feel pretty good about getting to the 8% to 9% on the top line. On the bottom line, as you can see, based on the change in our guidance from last quarter, $0.15, if you look at the midpoint of our range, $0.15 of our drop is due to foreign currency. So, that’s the majority of the adjustment on the EPS line. And we are really fighting through significant supply chain challenges and inflationary pressures and right now, obviously, taking it on the chin for our customers at least for this year. But we are taking – obviously starting to take pricing actions. Those – we won’t see a lot of that in this year. It will start to roll kind of more into next year. But I’d say the majority of our takedown is due to foreign currency, but obviously, very significant supply chain pressures that we are dealing with, but a very strong demand situation overall.

Robbie Marcus, Analyst

Great. Maybe as a quick follow-up, Kevin or Glenn, I am getting a little greedy here, but I am already looking out to next year. And we have heard from a number of companies that have reported so far to use 2022 as a base year, don’t treat it as a one-time easy comp. And I look at sell-side numbers for next year and it’s about 100 basis points of operating margin expansion. So I know nobody is good enough to forecast next year yet. But if you have any early thoughts on 2023 margins, are you committed to growing margins next year? And just if you have any color on your interpretation of where the sell-side sits right now? Thanks.

Kevin Lobo, CEO

Yes. Thanks, Robbie. As you can imagine, a lot has changed in the last 6 months. A lot could change in the next 6 months. And as you know, we always give guidance in January, which we will do. But what I will say is the spot buy situation has been pretty significant. It’s been a big part of our gross margin negative story for this year. That is starting to abate. I would hope that, that gets better next year. But obviously, we will update you in January in terms of the overall outlook. I would not call this year an easy year from the top line comparative. Driving organic growth of 8% to 9% is pretty heavy, but we do have a lot of very exciting launches next year. We have System 9 for power tools, 78 camera launch, a LIFEPAK defibrillator launch, a Neptune S which is a smaller version of Neptune for GI and ASC. Those are all really outstanding launches. So I do expect that the top line will continue to hum for Stryker next year. The bottom line, like we are going to work through these challenges, and we’ll have more to talk about in January.

Operator, Operator

Thank you. The next question is from Lawrence Biegelsen with Wells Fargo. Please proceed.

Lawrence Biegelsen, Analyst

Good afternoon. Thanks for taking the question. Just wanted to follow-up on the capital environment comments. Kevin, maybe just a little more color on what you are seeing with the large and small capital. And your comments on the Mako deal mix changes. I assume that’s because hospitals are preferring volume-based agreements. So, why do you think that behavior is changing? I mean, I think people on the call might – that may give people a concern that there is some change in the hospital capital environment? And I have one follow-up.

Kevin Lobo, CEO

Yes. Larry, first of all, on the Mako side, what I would tell you is this is not a new trend. This has been happening over the past kind of 6 months where we are seeing more deals being financed versus outright purchased and actually a move towards more rental agreements. And if you have a rental agreement, you can’t recognize all the revenue upfront. Even in some of our overall finance deals, we could recognize more of the revenue upfront. In a rental, the customer has the right to return the product. And so you can’t record all of the revenue upfront and that’s what our competitors are also offering. We are not really worried, because we’ve had virtually no returns of our product. Once we get our products in and you can tell by our utilization of Mako, which again, we’ll report on at the end of the year, we have highly utilized machines. And so – but that’s really – that’s a shift that’s been ongoing. It wasn’t a new factor this quarter. We are really pleased with the number of installations. But the revenue per unit that we can recognize upfront is lower. And we will be able to recognize more of this revenue over the life of the contracts. And then as it relates to the rest of the capital equipment environment, what I’d tell you is we wouldn’t be taking up our sales if we felt that the capital environment was softening in any way, shape, or form. The small capital is needed to be able to do procedures; power tools, wear-out cameras need to be replaced. And the medical business continues to get fantastic order growth whether it’s on the defibrillator or power costs as well as our ProCuity bed the orders are continuing to really pour in. We are not seeing hospital construction projects being halted at all. And look at our communications business, which is a large capital business, they had a terrific quarter in the second quarter and their order book continues to grow. So the timing of construction may get delayed a quarter or so, but no one’s canceling these projects. Nobody is canceling any of our orders. So we’re feeling, at least through the end of this year, feeling pretty bullish about the overall environment. Hospital liquidity is still strong. Now of course, they are feeling pressure on their profits but their liquidity is in a healthy position. And that’s really where the source of funding comes for capital.

Lawrence Biegelsen, Analyst

That’s very helpful. And Glenn thanks for the color on the gross margin. Kind of plugging the numbers into the model, it implies that OpEx growth is, call it, mid-single digits year-over-year in 2022 on a reported basis. I don’t know if my math is right. But how do you do that in an inflationary environment where you’re growing sales 8% to 9% organically? Thanks for taking the questions.

Glenn Boehnlein, CFO

Yes. Larry, that was quick with the model. A couple of things to keep in mind. We are seeing really good performance in our operating expenses, especially SG&A. The single biggest driver in SG&A is really sort of hiring and how prudent we are being about our hiring and the related costs that come along with every time we add a new employee. So we’ve positioned ourselves pretty well relative to that halfway through the year here and feel confident that we will be able to drive sort of meaningful leverage within our SG&A. I mean that being said, we are also mindful that we need to invest in R&D to make sure that we can hit a lot of these key product launches that we’re lined up for, for next year. And then honestly, too, if you move on down the rest of the P&L, I think I kind of gave you a little bit of guidance on OI&E. And we’re also seeing favorable performance in our ETR, which helps at the bottom as well.

Operator, Operator

Thank you. Our next question is from the line of Vijay Kumar with Evercore. Please proceed.

Vijay Kumar, Analyst

Hey, guys. Thanks for taking my question and congrats on a good year. Maybe Kevin, one on the guidance here. So the organic was raised by 50 basis points versus the prior guidance. I think the press release had some commentary about the guide raise was based on strong capital orders. Is the guide assuming the capital sales trends to improve in the back half as the supply chain improves? Or are we still looking at perhaps a constrained supply chain environment in the back half? And you did mention implant strength. I couldn’t help but notice the hip strength and you had new product launch in hips. Are we seeing share gains within hips?

Kevin Lobo, CEO

Well, let me start with the Hips. We’re feeling really great about our Hip business. And as you know, the Insignia launch was a very big launch. It’s not actually even fully launched. So we are still deploying sets out in the field. But the customer feedback has been overwhelmingly positive. And that also is compatible with the Mako robot. The Mako robot utilization for hips is also increasing pretty significantly, which is exciting. That’s due in part to the Hip 4.0 software that we launched, I guess, about two or three quarters ago. That new software, combined with this hip stem, I believe will position us for growing above the market in hips. Not everybody has reported yet. So let’s see how that plays out this quarter. But we’re really only getting started with that stem launch and very excited about the hip business. What was the first part of the question?

Vijay Kumar, Analyst

Capital.

Kevin Lobo, CEO

Yes. So on the first part of your question was on capital. So clearly, Medical is going to improve in the second half versus their performance. They were down organically in the first half of the year. They are going to be up pretty significantly in the second half of the year because they were the most affected by the shortages of electronics. We still – even though we’re guiding to this 8% to 9%, that doesn’t assume that we completely bleed everything. We’re still living in a bit of a tough environment out there. And so there is that risk ongoing that might move us towards the lower end of the range or move us up to the higher end of the range. On the implant side, we’re feeling pretty good about procedures are largely back to normal in most parts of the world. And really, it’s about the hospital staffing. If that staffing gets better, then obviously, there is a lot of pent-up demand for procedures. And we’re feeling very good about our position in those businesses.

Operator, Operator

Thank you. The next question is from the line of Pito Chickering with Deutsche Bank. Please proceed.

Pito Chickering, Analyst

Hey, good afternoon, guys. Thanks for taking my questions. Nice execution, pretty tough markets. You’ve been pretty crystal clear on this call that CapEx demand remains very robust. But a lot of large not-for-profit health systems have a September 30 year-end. And because of the margin pressure you’re facing hospitals due to labor. We’ve heard some discussions around CapEx reductions beginning with our fiscal ‘23 budgets, which began in the fourth quarter. So do you assume any changes of the macro CapEx environment when hospitals update their CapEx plans for this calendar fourth quarter?

Kevin Lobo, CEO

Yes. Right now, we’re not baking in any major changes. Certainly, if you look at prior situations where hospitals were under fire, we really didn’t see much of an impact at all in the small capital area. The one area you could see some impact would be in the larger capital. But of course, a lot of our business, we do have financing through Stryker Flex Financial, which does help with offsetting the kind of pressures that the hospital has in terms of overall capital. And as I mentioned earlier, coming out of 2020 with CARES Act funding, liquidity of hospitals is actually pretty good right now. So with our portfolio mix, I think we’re in good shape. If you think about something like Mako, it’s still early in the cycle and hospitals are really anxious to get that product. It’s not like they have old Makos that they are trying to upgrade and change. They are looking at increasing adoption early in the cycle. So I think our portfolio lends itself very well to what hospitals need. And they are going to prioritize our capital and potentially not prioritize other people’s capital. You could say that’s an optimistic outlook but just the way orders are continuing to stream in. And we haven’t had really any orders canceled. And we don’t have a history of that in our company. So do I have great visibility into the second half of next year? No. Do I have really good visibility through the end of this year and probably into the early part of next year? Yes, I think we do.

Pito Chickering, Analyst

Okay. Fair enough. On the same topic of hospitals under pressure just from labor, you talk to us getting some price increases versus normal decreases. I’m just curious – and I do understand it takes time for contracts to sort of roll off. But are you seeing any RFP sort of today or in the last sort of few months, which is showing confidence that hospitals are willing to absorb these price increases to offset your increased inflationary pressures? Thanks so much.

Jason Beach, Vice President of Investor Relations

Yes. Peter, it’s Jason. So I’d say a couple of things. I mean we’re not, for competitive reasons, going to get into the various tactics around pricing and those things. But I will say we see some shoots of confidence, if you will, in terms of customers willing to take price. And they understand the environment that we’re working in, right? So it’s going to look, to your point, very different depending on the business that we’re talking to. On the implant side, you’ve got the contract cycles and some of those things. But then there is also the MedSurg side that has historically gotten price, right? And we continue to expect that we will as we move forward.

Operator, Operator

Thank you. The next question is from the line of Matthew O’Brien with Piper Sandler. Please proceed.

Matthew O’Brien, Analyst

Kevin, thanks for taking the questions. I think this question is for Glenn. Glenn, you’ve got a bunch of different acute situations happening right now with FX and wages going up in raw materials and freight. It’s clear you’re going to carry a lot of those extra costs throughout this year. But do you think we can start to see – we’re starting to see easing of some of those things right now. We can start to see somewhat of a snapback in the first half of next year in earnings or just given your inventory levels and cost structure, is it something that’s likely going to persist into the first half of next year and maybe get better or more like second half of next year on the earnings side?

Glenn Boehnlein, CFO

Okay, Matt. Without giving 2023 guidance, what I will say is the spot buy and the chip situation in the electronic component situation, we are seeing some easing of that. And we are seeing examples of where we are going to our regular suppliers and they are supplying us these components based on our negotiated contract pricing. So we’re not necessarily having the only spot markets for everything. That being said, some of these other costs that are really driven by inflation and they are commodity oriented for metals, for plastics, for transportation, some of those, I think, are going to linger for a while for sure. And I would expect to see those bleed into next year, certainly the first half of next year. But I am hopeful that the spot by kind of premium things that we have experienced pretty severely in this quarter and in Q1, we will actually start to back off.

Matthew O’Brien, Analyst

Got it. That’s very helpful. And then the Instruments and Endoscopy numbers were really strong. I would just love to hear about durability of that – of those products are not the most sexy products, I guess, for lack of a better term, I guess, across med-tech. So just talk about the durability there. And then Kevin, I think you said last quarter that Neurovascular had some competitive pressures in ischemic. Is that still the case today? Thank you.

Kevin Lobo, CEO

Yes. Yes. First of all, I actually think Instruments and Endoscopy are pretty exciting businesses. But really, this is really about having terrific products. Our power tools are market-leading. Our flight helmets are market-leading. Procedures are picking up. And if procedures pick up, every time you do an orthopedic procedure using our flight helmet, you’re using our – if you’re using cement, you’re using our cement mixers. You’re using our power tools in the general surgery area. You’re using our cameras. They go through the autoclave and then they break down and then they have got to be replaced. And so we have obviously the leading imaging system. And so – and our sports medicine business has just been on fire, right? It’s growing strong double digits. And our ASC offense, we had a fabulous second quarter in ASC. We have a couple of new shoulder products with our in-space balloon as well as our ALF event peak anchors. And so we have a lot of strength across those two businesses. And they always have been kind of consistent growers for Stryker, if you go back over the last 15 years. And so they are going to continue their momentum. They have a really great engine of R&D and new products and power tools and cameras have new launches coming up next year. So I think it’s absolutely – they are absolutely durable. What was the second part, sorry?

Matthew O’Brien, Analyst

NV.

Kevin Lobo, CEO

Yes. So Neurovascular, look, the market has been a bit soft in the U.S. Just keep in mind, the U.S. is certainly smaller in NV. They actually have more of their sales outside of the United States. It’s a little different than the rest of the Stryker portfolio. But the market has been a bit softer. And on the aspiration side, there have been a lot of competitive entrants in the United States. A lot of new aspiration products, which when the new products are launched, it does take surgeon attention. They want to try them out. And so there has been a bit of a factor there that has touched that business. But overall, I still feel very good about the Neurovascular business. It’s still going to – we’re still treating just a small fraction of the patients that need to be served. And over time, we’re sure that, that business will pick up, not just outside the U.S. but also inside the U.S.

Operator, Operator

Thank you. The next question is from the line of Joanne Wuensch with Citi. Please proceed.

Joanne Wuensch, Analyst

Good afternoon. And thank you for taking the question. I want to talk a little bit about the pricing environment, both the headwinds that you experienced in the quarter. And then it sounds like you’re going contract by contract and trying to right size some of that to reflect inflation.

Glenn Boehnlein, CFO

Yes. I think – hi, Joanne, in terms of Q2, we did experience some of the pricing difficulties that you felt in the pricing number, the 1.4% negative that we disclosed. I will say that that’s pretty consistent with the range that we feel in normal years. I do think that we have a very big focus with our sales teams on pricing and with our customers. And we actually saw positive pricing performance related to our U.S. MedSurg and Neurotechnology business, which is a good indicator that we are starting to enter these conversations with our customers. Our customers are doing their diligence. They understand that just with their staffing, with their nursing that prices are going up and that’s impacting us, too. And so we are having the conversations. Although given the contracting nature of some of our business, it just takes time for some of these things to stick. And so I do think that we are beginning to really lay the groundwork to really impact pricing over the future well into next year. And so I’m confident that we’re laying the processes in place now to make sure that we work with our customers to implement price increases.

Kevin Lobo, CEO

Yes. And keep in mind, Joanne, like some of the contracts have rebate clauses. And so you see those rebates do show up in our price number and that’s a bit of a lag effect, right? So they earn the rebate and then the rebate flows through. So that’s another part of this timing issue where it will take time for this to show up even as we negotiate higher prices for our products.

Joanne Wuensch, Analyst

I appreciate that clarification. As a second question, are some of the pipeline products, maybe even for next year, including other applications of the robot, maybe finally shoulder or spine? Thank you.

Jason Beach, Vice President of Investor Relations

Yes. Joanne, it’s Jason. So at this point, we don’t have anything further to announce. Obviously, as we get closer to launch timing, we will do that but nothing further at this point.

Kevin Lobo, CEO

Yes. The one thing I’d tell you is the Spine team is pretty excited about their guidance, which received approval. Okay. It’s not a full robotic solution but it is a pretty exciting offering within enabling technologies. We now have the spinal application approved and the cranial application is sitting with the FDA. But that should give them a bit of a lift in the second half.

Operator, Operator

Thank you. The next question is from Joshua Jennings with Cowen. Please proceed.

Joshua Jennings, Analyst

Hi, good afternoon. Thanks a lot for taking the questions. Kevin, I was hoping to just ask about staffing shortages and impact on the implant business. I think they kind of felt that they may have peaked during the Omicron surge. And absenteeism contributed to the staffing shortage pressuring like procedure volumes. But do you feel – and it’s probably hard to quantify that staffing shortage have improved gradually over the last few months? Or are we – has that kind of stalled? And are you expecting within your updated organic revenue guidance that staffing shortages will improve? It sounded like one of your previous answers that that wasn’t the case but just wanted to clarify that.

Kevin Lobo, CEO

Yes. Certainly, we saw choppiness in the second quarter. That’s kind of the word I would use. And it could be related to staffing challenges just hiring staff and having consistent staff that actually know the procedure, so you can do the same number of procedures that you used to do in a day and COVID, which affected, frankly, some of the nurses as well as patients who had to delay their procedure because they contracted COVID. So that type of choppiness is actually still lingering right now as we speak. But we’ve seen a nice uptick in procedural volumes, and we do expect that uptick to gradually improve; we’re not calling for a giant spike. But we are calling for this kind of environment to continue and see gradual improvement from where we were in the second quarter through the rest of the year.

Joshua Jennings, Analyst

Understood. Thank you. And maybe just a follow-up on just the Spine business and I know there was some scolio softness. It sounds like Glenn called out. Is there anything to highlight just with the market recovery in spine relative to other ortho procedure categories? Or do you think the 2Q performance was more Stryker-specific? Thanks for taking the questions, guys.

Jason Beach, Vice President of Investor Relations

Yes. It’s Jason. I don’t think at this point there is anything more to highlight. I mean obviously, we’re early in the earnings cycle as well. So tough to tell how we compare the rest of the market but I’d say nothing else to add at this point.

Operator, Operator

Thank you. The next question is from the line of Kyle Rose with Canaccord. Please proceed.

Kyle Rose, Analyst

Great. Thank you for taking the questions. I wanted to touch on the Mako dynamics. And you talked about some different ordering patterns. Is that more indicative of maybe going into competitive accounts where you haven’t been historically and they want to rent before they fully commit? And then I do have a follow-up.

Kevin Lobo, CEO

Yes. It’s not that we’re showing up anywhere differently. It’s just that if your competitor offers a rental option, the customer says do you have a rental option. And so the idea is look, we’re not going to let our prior contracting approach stop us from competing. And so we’ve introduced a rental option and started to promote that, just to make sure that that’s not one of the barriers and that let the technologies fight head-to-head and let the best technology win. So it’s more of a response to what has been happening in the marketplace, not so much that we’re going into different accounts. We’ve always been active in competitive accounts as well as active with surgeons that use Stryker products. We’re really pretty agnostic. Whoever wants to use robotics, we want to make sure that if we show up and that they are able to try our technologies, and we believe we have the best system in the market.

Kyle Rose, Analyst

Great. And then historically, you’ve talked about trends in the ASC market and putting together one sales team into the ASC. Maybe just touch on what trends you’re seeing in the ASC and how that focused sales approach is playing out commercially? Thank you.

Kevin Lobo, CEO

Yes. Look, I’m really excited about our success in the ASC market. One of the ways you can gauge that is just our sports medicine business, which is normally involved in those deals and has been a big beneficiary of the overall Stryker offense and also Mako. So with the Mako, sales in the ASC has continued to increase. So if you look at the percentage of Makos and ASCs versus hospitals, that ratio has been gradually increasing. It increased again in the second quarter. So the ASC is a place that Stryker can really play well given that we’re so deep in the orthopedic service line with capital equipment as well as implants and disposables.

Operator, Operator

Thank you. The next question is from the line of Chris Pasquale with Nephron Research. Please proceed.

Chris Pasquale, Analyst

Thanks for taking the questions. I wanted to ask two here upfront. First, if you could just go into some more detail on what’s holding back trauma whether that’s a product portfolio issue or a market issue, that would be great. And then Kevin, you mentioned a couple of times being excited about the pipeline. I wanted to just highlight maybe two or three products that you guys have coming in the next 6 to 12 months that we should be paying attention to?

Kevin Lobo, CEO

Yes. First of all, I think there is nothing holding back our trauma business. I would tell you that we had a massive comp from the prior year, if you go back to the prior year second quarter, we had pretty massive comparatives. We have a great trauma business, whether it’s the upper extremities business, which grew double digits again and we will continue to grow double digits for the rest of the year. I think Foot & Ankle, the total ankle had another really strong quarter in the second quarter. It was a little bit soft on the sort of the forefoot procedures. And then the overall sort of underlying core trauma business, the market was a little bit softer; that happens from quarter to quarter, right? So whether it’s weather, whether it’s who knows what, it’s not unusual. But I have zero worries about our Trauma and Extremities business. I’m pretty bullish on that business for the future. Was there a second part?

Chris Pasquale, Analyst

Pipeline.

Kevin Lobo, CEO

Product pipeline, I think I mentioned before that we are really entering a pretty exciting period going into next year with System 9 and next-generation power tools, 78 camera, the next-generation camera life pack defibrillator, which is the big sort of the big, large complex defibrillator and then the Neptune AS, which is a smaller version of Neptune that will get us into procedure areas that we are not currently in today, especially GI, which is a very, very high-volume procedure. An amazing feature of this product is the ability to be able to capture the polyp. And if you have to watch what they have to do today to find polyps within the waste that they have to sort through, it’s not very pretty. And this is a very, very elegant solution with this innovation. And so something we are very excited about being able to launch. It will get us, frankly, into brand new markets where we don’t even play today. So, those are some of the launches, I am sure I am missing a few from some of the other divisions. But those are big launches. And as you know, when we launch those big – when we have these big launches, they really do drive growth than they had historically.

Operator, Operator

Thank you. Our next question is from the line of Steve Lichtman with Oppenheimer. Please proceed.

Steve Lichtman, Analyst

Thank you. Hi, guys. Glenn, on the increased headwind you are building in for inflation this year, I was wondering versus your assumptions on the 1Q call where the biggest deltas were. Was it the persistence of spot buying at elevated prices that maybe are going on longer? Is it higher base assumption on input and labor costs? Just wondering if one stood out or if it was just across the board?

Glenn Boehnlein, CFO

Yes. I think probably the single biggest thing was the spot buy and the premiums. I think as we entered into Q2 and exited Q1, we saw that, that was happening. But who could imagine the demand that was out there relative to us competing with car companies and a whole bunch of different kind of competitors that we never really had before with those vendors. And so, I would say that those premiums that we paid just so that we could make sure that we were serving our customers and could deliver them products were the single biggest thing that maybe changed from guidance last time to guidance this time. I think the other though persistent thing that we are seeing is just because the supply chain has been so spotty, we also are just – we are feeling inefficiencies in our processes and how we manage our manufacturing across the globe with sort of inconsistencies of when we will have raw materials available for teams to work on. So, I do say it’s probably spot buys that’s the one big thing that really sticks out. But a lot of these little nits on inflation are also impacting us as well.

Operator, Operator

Thank you. The next question is from the line of Steve Lichtman with Oppenheimer. Please proceed.

Steve Lichtman, Analyst

Glenn Boehnlein, CFO

Yes. I think probably the single biggest thing was the spot buy and the premiums. I think as we entered into Q2 and exited Q1, we saw that, that was happening. But who could imagine the demand that was out there relative to us competing with car companies and a whole bunch of different kind of competitors that we never really had before with those vendors. And so, I would say that those premiums that we paid just so that we could make sure that we were serving our customers and could deliver them products were the single biggest thing that maybe changed from guidance last time to guidance this time. I think the other though persistent thing that we are seeing is just because the supply chain has been so spotty, we also are just – we are feeling inefficiencies in our processes and how we manage our manufacturing across the globe with sort of inconsistencies of when we will have raw materials available for teams to work on. So, I do say it’s probably spot buys is the one big thing that really sticks out. But a lot of these little nits on inflation are also impacting us as well.

Operator, Operator

Thank you. The next question is from the line of Steve Lichtman with Oppenheimer. Please proceed.

Steve Lichtman, Analyst

Glenn Boehnlein, CFO

Yes. I think probably the single biggest thing was the spot buy and the premiums. I think as we entered into Q2 and exited Q1, we saw that, that was happening. But who could imagine the demand that was out there relative to us competing with car companies and a whole bunch of different kind of competitors that we never really had before with those vendors. And so, I would say that those premiums that we paid just so that we could make sure that we were serving our customers and could deliver them products were the single biggest thing that maybe changed from guidance last time to guidance this time. I think the other though persistent thing that we are seeing is just because the supply chain has been so spotty, we also are just – we are feeling inefficiencies in our processes and how we manage our manufacturing across the globe with sort of inconsistencies of when we will have raw materials available for teams to work on. So, I do say it’s probably spot buys is the one big thing that really sticks out. But a lot of these little nits on inflation are also impacting us as well.

Operator, Operator

Thank you. The next question is from the line of Steve Lichtman with Oppenheimer. Please proceed.

Steve Lichtman, Analyst

Glenn Boehnlein, CFO

Yes. I think probably the single biggest thing was the spot buy and the premiums. I think as we entered into Q2 and exited Q1, we saw that, that was happening. But who could imagine the demand that was out there relative to us competing with car companies and a whole bunch of different kind of competitors that we never really had before with those vendors. And so, I would say that those premiums that we paid just so that we could make sure that we were serving our customers and could deliver them products were the single biggest thing that maybe changed from guidance last time to guidance this time. I think the other though persistent thing that we are seeing is just because the supply chain has been so spotty, we also are just – we are feeling inefficiencies in our processes and how we manage our manufacturing across the globe with sort of inconsistencies of when we will have raw materials available for teams to work on. So, I do say it’s probably spot buys is the one big thing that really sticks out. But a lot of these little nits on inflation are also impacting us as well.