Stryker Corporation ($SYK)

Welocme everybody, Travis Steed, first presentation of the afternoon. Welcoming Stryker up we have Spencer Stiles, President and COO; Jason Beach, VP and Group CFO, What's the division? Make sure I got the name right.

MedSurg & Neurotech.

MedSurg & Neurotech. Okay. And then Nick Mead, VP of IR, probably 1 of your first far sites.

Good.

Thanks everybody for joining us. Spencer, maybe first question for you. As you kind of moved into the COO role and I'd say, probably have more influence on the Stryker strategy going forward. What do you think kind of changes? What are you doing differently in this kind of bigger picture strategy-wise for Stryker as you have more influence?

Super. First off, Travis, thanks for including us. It's been great, and I appreciate the question and the time today with everyone. So high level, nothing really will change. We still love our strategy about leading our markets with innovation, M&A, our specialized businesses that we run -- that will still be foundational to our growth strategy in the future. And our expectations will continue to lead at the high end of med-tech and perform at the high end of med-tech. So not a lot of day in and day out change. There's always things we're looking at. some more portfolio management in some of our tenant geographies on a regional basis, but a lot more of the same of how we win in the marketplace.

Okay. That's helpful. And going into the Cyber to, maybe, first of all, what did you learn kind of as an organization, I think about stronger on the other side?

Well, it's been an interesting first part of the year and stepping into this new job, I took over as January 1, and we've had all kinds of fun. We've had a rotation out of med tech. We've had a cyber incident. It's -- it's off to a wild start, but it's been really interesting to go through our cyber incident. I don't wish it upon anybody. It was pretty significant, and it talk a lot about our organization your response. But in good striker fashion, our resilience has been incredible. -- a testament both to our customers and our employees all over the world so alitretinoin to getting our business back up and running. We are sort of out of manufacturing for a couple of weeks on and off with some customers just for a handful of days. and then fully operational as we call it on April 1. Thinking back maybe a couple of things we learned. One is the empathy from our customers and our customers trust in us. And really, the gratitude they showed in the support where they stood biased through this saying, how can we help? This is an attack on health care? How can we ensure that we're making sure we've got the right systems and protections in place. And so I think it's a good lesson for all of us just to think about ensuring we have the right investment and contingency plans, if things happen like this. Second, again, is just on the resiliency of our workforce and how we run our business in terms of goal setting, annualized targets, our high expectations we have for ourselves. If you're walking the hallways at Stryker today or you're at a hospital, some of the Stryker sales professionals and you ask them how is it going there like we're back to do and we do best, winning in the marketplace, competing for our business, taking care of our customers. And I credit the organization really being focused around the customer throughout this entire event. And that was probably the most important learning. And if this happens to anyone else. Keep that as your true north. And the rest of it, you can sort of figure out. So we're back up and running and really proud of where we're at today.

Helpful. And I guess when you think about the gap in Q1 from what you were expecting versus what you reported I assume share was mostly kept shares, so they probably didn't lose a lot of share, correct me if I'm wrong. Does all that revenue come back over the course '26?

Yes. Generally, we think of this all is a 26 matter. It will phase over Q2, 3 and 4, depending on the business and the cycles that we have. As we kicked off January and February, our plans were in place, we just reaffirmed our full year guide on our earnings call, and we feel confident in that mainly due to the incentive programs we have and the look that we have into our business in terms of the demand from the customer, both on the consumables, implants and on the capital. But generally, we remain very confident full year outlook and sort of the outlook that we have for the organization.

Did you put special incentives in place to...

We did it different than even in COVID. So when we were in COVID, it happened to all of us we had sales professionals asking, "Hey, are you going to change something in the incentives? Are you going to change our expectations? We haven't done any of that this time. Another reason we have confidence in our full year and the outlook. We haven't needed to. There hasn't been a request -- and our sales professionals and our service organizations, they're back to doing what they do each and every day with the expectation of delivering on their commitments.

Can you help us understand on the procedure side? There was a little bit of a revenue recognition timing just how long it takes to get procedures as we scheduled and how much will come in Q2 versus the second half?

Yes. We've described sort of 3 buckets of how we're sort of capturing the couple of weeks that the cyber incident impacted us. First was revenue recognition. The smallest portion, a lot of that is -- then we break it down to the other 2, the capital businesses, which is some made to order of production, just building back up. And we've implemented third shifts, weekend shifts some additional lines there. And then the other bucket is on the procedural side, both on the consumables and implantables. Interestingly, on the timing, 1 might think that if your procedures delayed a total knee, for example, on March 22, you can reschedule for April 10, not so fast. Hospitals are fully optimized, at least they believe they are in their scheduling criteria. So you're dealing with the hospital schedule next is the doctor's schedule. They might only work, Tuesdays and Thursdays in surgery, they're fully booked up for x amount of time, then you have personal the patients schedule as well. And you're bringing those 3 things together as you reput these surgeries on the schedule and on the books, and we've seen some of that in Q2, some of that in Q3 and some of that in Q4. So it sort of spreads throughout the full year. And interestingly, something like a total me, although not ideal, you can live with that pain. It hurts, but you can push that out a couple of months as needed and still get that procedure done.

And then those kind of the spreads kind of evenly over Q2, 3 and 4?

Yes. It spreads variously depending on how we're seeing things a little bit. It depends on the business. And if you capture all 3 of those, you'll see some different aspects we're back-end loaded anyway. We weren't our original plans based on new product introductions. So we'll see that second half of the year accelerate growth. So we're comfortable with that. But again, we feel really good about the full year.

And then the capital side, just when you think about manufacturing and production, how much of that is the impact on the capital side versus kind of shipping?

It's a portion of it, but we're getting caught up. Maybe, Nick, you can comment here. Nick comes from our beloved medical business, where we make beds. And Nick, maybe you can comment just what we've done at Medical.

Sure. Yes. Spencer mentioned the additional shifts that we put in place. This is just 1 example of many across the company. But for our Procuity bed, we have since activated our teams, hired a third shift. We're in the process of training that third shift now. And by the end of the quarter, they'll be producing finished goods that will start flowing through in the back half of the year.

And Travis throughout all that, we've seen the order book continue to grow and build. Our backlog continues to go up. So we've continued to have that customer continuity through the entire time.

You're going to have enough production to kind of meet all the demand for the...

Yes, we feel really confident credit to our operations team, over the last handful of years, we really invested in our competency there as we think about our manufacturing strategy and manufacturing footprint, our best cost sites, our supply chain resiliency, our procurement -- all that is a much stronger organization today in Stryker and gives us confidence in our outlook for the full year.

And why can't capital kind of pick up in Q2 more -- and why is the capital pushed more into the second half on the recovery there?

That's sort of how the plans were. Some of that is production that we're building up some of that capability right now. And when you think about even adding more capacity, -- you have to hire these people, you have to train them. They have to make sure they build the extra line. So some of that is built in. So that's why it drifts into Q3 and Q4 as well.

Okay. One question we've gotten a lot is what did you guys just continue to reiterate the full year guide despite the side where tag.

Yes. Your...

No, -- why did you have the confidence? Or why do you decide to reiterate the full year guide versus to say, hey, we year?

Yes. A couple of reasons. One, we have a line of sight to it. We understand this is the opportunity for it. The second, that confidence in those plans for the sales professionals, their incentives, their quotas, their goals, their targets for the year. they still have those all in place. We don't want to come off that at all. We believe that's our expectation. We have plenty of opportunity and the timing of this. So this took place not in a great time in the quarter at the back end of the quarter, but it was still in the front side of the year. So there's a lot of the year left in front of us. to ensure that we're putting all the right plans in place, and we can capture back all that business. And you gave a range, obviously, for your guidance as you always do a full confidence in the high end of the range, even today, we give ourselves that entire range. We'll keep you posted as we learn more throughout the year, but that's part of the reason why we reiterated our guide in that range, knowing that we'll learn as we go throughout the...

Okay. Sure.

Maybe just 1 other thing I'll add there just in terms of why do you reiterate coming off an event like the cyber event. I mean, the reality is, as we've said, right, while material to the first quarter, we see it immaterial on the full year, right? And so as Spencer said is you stack up all the pluses and minuses when it comes into thinking about the full year, feel really good about the full year guide, which is obviously why we reiterated.

And when you think about -- you typically build in some cushion on the full year guide, are you -- is this using some of that cushion for the full year? Or are you kind of fully in your whole plan?

I think right now, where we're at in the year, we're still working through that to understand what upside or any downside that might be in that guide for the full year.

Okay. That's helpful. I think the Street took out like 8.9% for Q2 on the revenue side. Is that kind of how you're seeing of the year. .

We don't guide to the quarter. I would tell you that our plans as we think about Q2, coming even out of the incident, but even on the full year basis, we're right on track where we thought we'd be in Q2, and we're holding pretty strong, and we're going to call it sort of halfway through and feel really good about what our expectations were for Q2.

Yes. Just maybe just 1 thing to add there to Spence's point, we don't guide to the quarter. I think some of the messaging that Spencer has already talked about, about the rev rec, the procedures, the capital. I think -- the Street has definitely listened in terms of how that phased approach is across the year. So feel good about where consensus is for Q2.

Okay. Anything else that's on the cybersecurity and cadence of the year on this topic that's come up today that you wanted to highlight?

Just massive a bit of gratitude to our organization, the customers for helping us get through this. Maybe as we've studied best practices in benchmarking, Stryker did what it did. It performed extremely well, this recovery effort for the scale and scope of the white as it's called, was sort of best-in-class. We're really proud of that, and we're chipping away and making sure we take care of our customers.

Okay. on kind of some macro stuff, ACA utilization, people are kind of worried about, is there an impact on procedures? Are you seeing anything? How -- what are you exposed to there?

We're really not. Starting in Jan and Feb before the cyber, we saw the volumes that we expected didn't see a lot of change. If you think of our portfolio and all the different products we sell, we have a great mix of products on a consumable implantable, all different type of coverage from commercial pay to Medicare and Medicaid. And we really haven't seen a lot of shift at all in the volumes other than what we expected originally in terms of the outlook for the year, and that's still on track.

So kind of call the utilization environment fairly stable?

Fairly stable as far as we've seen across our business. Yes.

And then on the cost and the inflation side, there's been some inflation worries as well?

Yes. We've contemplated it throughout the year. Maybe a benefit, as I've described throughout some of our meetings this morning of the cyber event is we probably put a few controls in place a little earlier than the rest of the industry since this happened to us in the early part of March. We slowed down some of our transactional costs, travel, hiring, things like this, just to be thoughtful, not knowing exactly where the Cyber was going to go. And as we hear more and more noise about the inflation, we're keeping track of it, fluid environment. We're watching it, but we haven't seen anything material to our business yet, 1 way or the other. The other things we still have our controls on is on price. And so some of our businesses where we have price capabilities, we're making sure we're thinking about those and bringing those into the discussions with our customers, but we feel pretty good about our place right now, but we're monitoring the situation like everyone else.

On the inflation side, what where is your kind of exposures in all resins, how much computer chips?

Yes, I think I would describe it more on the supply chain of the chips, and that exposure is still sort of immaterial in our entire supply chain less than 1% and even a smaller portion of the memory chips that you're hearing some of the demand. Even on the pricing side of those or the increase in the cost, it's not quite the same increase like it was back in '22 in the supply chain crisis. So it's a little different. And we have some other things in our business that are favorable that is offsetting some of that and our discipline around the manufacturing excellence.

I talked about on some other things. But when you think about 2022 versus now, if inflation does like this gets worse or do you think you can respond faster or better than you did in '22.

Mentioning back to this competency we've built in our supply chain, our procurement our strategic thinking about this ensuring we have line of sight. We think we can respond a lot faster. We're still going to prioritize customers and taking care of the customers, much like we did in '22 -- but right now, we don't feel there's any exposure to our outlook that we provided to the Street.

And then pricing strategy, anything you call out on pricing?

Yes, the competency. So a modest improvement is how we described at the beginning of the year, still on track for that. More of that comes from our MedSurg side of the businesses where we have a little more price control based off the product type and the portfolio we have there, a little less on the orthopedic side, but orthopedics has been stable. Mako really helps with that, make us a closed system, as you know. So that gives us some price protection and still provides a world-class clinical outcome. So we feel pretty good about where we're at with price. The last thing I'd say on price is, I think you've heard about our journey over the years of building this organization, our customer solutions, which helps with our contracting across our entire portfolio, partnering with customers. We build pricing and discussions like this in those contracts. And so we have a lot more consistent approach with our customers and an opportunity there, if things change to pass along some of that cost to our customers as well.

On the margin impact of the cybersecurity, how is that impacting margins? How much is excluded in non-GAAP versus included the numbers we use?

Yes. There's certainly some element, as you know, that went non-GAAP. There's also elements like lost absorption that's running through the adjusted P&L, right? I think we'll probably get to tariffs here, but I'll just deal with it, you're really to prove you. Yes, that's right. So if you rewind the clock on tariffs to January, right, we said it was roughly $400 million in the guide -- as you know, since then, AEP, as an example, has been invalidated. So that's obviously created where you had, call it, a 15% baseline tariff now down to 10%. So that's created some good news to the guide, if you will that is offsetting then some of these, I'll call them, pressures that came into the business as a result of the cyber event.

Yes. How do we think about the timing of all that over the course of Q2, 3 and 4?

Yes. So a big portion of it already happened behind us in Q1. And then there's -- in terms of the cost pressure side of the cyber event, then there's a little bit from an absorption side that will trickle through over the balance of the year. And then tariffs, I mean, obviously, it's extremely fluid. The 10% is in place today. We'll see what happens as we go through it.

Do you get refunds on the tarrifs?

So that's the other piece. -- public set up by the federal government, right? There is a refund process that we're obviously participating in as well.

When do those hedged a certain quarter?

Yes. We haven't obviously disclosed amount or timing, but I would expect it to be over the course of the year.

Okay. And then kind of when you look for it, then assume there's not a major change in tariffs is like looking to '27, is there any kind of -- is that a headwind of tailwind? Any kind of puts and takes in '27?

Well, there's a lot to talk about for 2027. We'll talk about that in January of next year. So probably I won't say a lot at this point about 1.7%.

Fair. The margin 150 basis points over the LRP though, can you kind of walk through how that -- is there -- when some years bigger or less or can I have to think about that because I think that was over a CAGR and some of the drivers behind that?

You want to talk about the supply chain stuff? -- go ahead. Yes, sure. So to your point, obviously, we said 150 basis points plus over the next 3 years. we've effectively held our guide this year as it relates to margin expansion. We've talked about a variety of things, I think, at our Investor Day in terms of operational excellence, I would call that would play into that there's certainly a level of OpEx leverage that we continue to get with our plans in a high-growth company, right? There's leverage that you get throughout the P&L and that, that plays into the margin expansion goals over the next 3 years.

Okay. That's helpful. And then -- on the capital backlog, I mean some of the hospitals talk about impressive budgets and worries about ACA and stuff like that. It sounds like your capital backlog is really strong. Just no signs of that slowing?

No signs it's flying at the moment. We've been really grateful for the customers continuity with us and continue to show their demand. The orders continue to outpace the shipments that we had over the last couple of months, which is great to see. So we're building that backlog. We're adding this additional production capability. But right now, we've seen a relatively healthy CapEx environment.

And which -- is it like 6 months visibility that you have in?

You bet. It sort of depends by business. We have various cycles. Our communications business is an outlier. Sometimes it's even longer for a new hospital build, things like this, but some can be a couple of weeks up to a few months.

Okay. And then, Mac, I look every call we have, you're putting a record made...

Record braking. What's going on to make online -- we joke about it and say that at some point, is how we do it at Stryker, but we like saying it's record-breaking still. We did have another really strong quarter I'd point us back to in the pandemic when we were really aggressive in our strategy to get more into the market and in particular, our focus on teaching institutions. This has led to more of the standard of care -- so more and more people as they enter into their practices or asking to have this technology in their capability set, either at their hospital or surgery center -- so we're just seeing this ongoing demand in growth across Mako, which is very favorable for our implant business as well. You'll also note as we added the Mako RPS, which is a smaller footprint, handheld with some robotic technology and a smart power tool. Instill our premium products Mako, but this fills a nice opportunity in the market, and that's all competitive, focused right now as well. So that's been a really nice addition and we launched it at Academy, it's hit the ground running right now. So...

How do you think about your robotic portfolio in ortho as some of the other competitors launch newer products in different kind of different directions and bigger portfolios?

Yes. The focus is still really on that clinical outcome. -- can we provide this consistent safe and effective intervention with the enabling technology with Mako? And the answer is yes, yes and yes. And so that's part of what makes Mako so attractive -- the surgeon that's operating in the morning is every bit as good and accurate and perfect in that case as they are 8 at night, and they can do that over and over and extends longevity in how they provide their care as well. So we really like our position in the marketplace with Mako. We continue to win competitive situations when it comes up. And really, it's that focus still on that clinical outcome for those patients.

I think you've been in robotics in 12 years in atopeutics, if I remember correctly. -- how hard is it to run a robotics program in organic. We know in other areas of robotics is tough, but...

In ortho stuff. They're thirsty. It takes a lot of dedicated R&D investment. I would even argue looking back. It's a little easier to say. For some of those early years there as we focus in on the knee application, we actually moved some of the investment off the implants and put it solely on the robotics. So you probably starved a little bit the implants, then we worked our way back. Now you're seeing the benefit of that, things like Triumph Longo, and Cigna and the hit, these are areas that we've caught back up on and so we have a more balanced portfolio, but they're really difficult. They're demanding you have to invest both in the hardware platform capability as well as in the applications and once you build that competency, it's really hard to catch up with it because it's sort of embedded in how you operate and deliver your solution.

And then I guess on the implant side, we've heard some competitors getting more aggressive on price and take accounts. Are you seeing that in the market? And how are you responding?

I would say no different than it normally is in a competitive environment. We haven't seen anything specifically. Orthopedics has been a very competitive space for a long, long time. And price is 1 factor that goes into the purchasing decision but not the only one. There's oftentimes we might win where we're actually charging more, but it's due to the service and the technology and other things that we provide in that scenario. So we haven't seen anything of note. We've had some of the same questions, but nothing that I would point to that we've seen any change in the pricing strategy.

Sure. And you established the new orthopedic tech business. What's the strategy behind that? Like why...

We call it Orthotec. So this is the combination of our Mako organization, which we call MET in our orthopedic instruments. So think of traditional heavy-duty power tools and the personal protection. So flight helmet systems, autogas -- we put those together all under our orthopedics umbrella. It was really important to bring the power of our power tools. We're developing the Mako RPS system with Mako at the same table. We wanted those leaders talking, thinking about how do we show up to the customer, understanding the customers' needs, meeting them where they're at. So we brought those together and we actually think it's another great strategic differentiator for us. world category-leading power tools, world category in personal protection, world-leading category leading enabling technology and Mako, MakoRPS.

Okay. That's helpful. When you think about the kind of the pipeline at Stryker kind of growth A lot of it's in med search probably. But what's -- you talked about cameras and stuff like that. What's kind of the pipeline here at Sarkis going to kind of keep growing above your markets?

Yes. We're really proud of the innovation cycles that we have in our business. new product flow that's continuing to come as well as the M&A we've done over the last few years, it creates organic growth for us year in and year out, and some of that's exposed us to new markets. And we have winners across all those different portions of our portfolio. I'll highlight a couple Think, for example, something like in our neurosurgical business, fast-growing brain surgery business, Sonopet 2, that's a next-generation ultrasonic aspirator helping the remove of tumors from brain surgery that second gen is coming out best-in-class product, category leader. And we have an example like this across all of our different businesses. IVS, 1 of our fastest-growing, benefiting from the Virtus acquisition we did in 2025. That's the mild procedure bringing phenomenal growth to the business. In Orthopedics, gold, the Hinge still is bringing a lot of new growth. Pangea recently cleared in Europe and trauma perform here a role in our upper extremities business. These are all new technologies that continue to drive and outperform the markets and their growth rates.

You guys have been pretty visible on seeing M&A is a big strategy. This year, our balance sheet is in a really healthy place. How should we think about M&A for Stryker in '26?

It remains our #1 use of cash, our top priority. We love our pipeline, interesting environment, maybe a benefit of some of the rotation out as valuation shifts. So it just gives you another sort of portion of your thinking as you think of some of the companies and where they sit right now in the marketplace. We've been active. We just closed on ABS and extension in our Peripheral Vascular and are Stryker PV business and ABS giving us an IVL technology. And so we're really excited about that. But that's -- more of that will be on our horizon. -- a variety of tuck-ins, adjacencies. The same adjacencies we've been talking about from HIT to neuromodulation. We do keep track of the STR space off tissue robotics and sort of track that. It's not a must-do but obviously has significant growth, and we have some synergies that position appropriately. Women's health, urology, there's just a lot of really great market still for us to grow our business in that we have some competency that we think we can bring this shrinker strategies to that outperform and grow.

When you think about health care IT, there's a lot of okay carriers in that market. Can you help us understand like which direction you want to go in that market?

We call it Smart Care, the smart hospital. It's the bedrock. It's the combination of Vocera and care. So you're bringing workflow technology and ambient visualization together really helping drive greater efficiencies, predictability, safety, take the burden off the care providers. But 1 of our great differentiators is taking a platform like that, that lives within the hospital and tying into the operating room. Our real estate in the operator room is second to none. When you think if you walk in an operating room, the lights, the table, all the products around it, it's all Stryker. And we want to connect that ecosystem of those platforms into the SmartCare and smart hospital really defining and differentiating sharing that data and providing that information for better care.

On soft tissue robotics, you said it's not a must have. How much is it?

Look, it's a fascinating market. There's a big incumbent there that's had a significant track record of success. You have to be really thoughtful about if you were to get in it, how do you position a technology? What niche does it solve? What problem does it solve? Is there some connectivity or synergy that comes from being in Stryker -- so it's something we monitor. But again, it's not a must to add. It's something that we think that we know pieces of that market well. and we'll continue to stay close to it and watch for if there's an opportunity or not.

I mean I feel like Stryker has been saying 7, 8, 9, 10 years, you've been looking at 50-plus companies in that market. Is there a point where you have to make a decision, yes or no in this market?

I don't think there's ever a point in some of these innovation is a beautiful thing. There'll be new technologies, new differentiation. There are more winners and losers in that that you just mentioned there, for sure. And so we're keeping track of that. But again, I don't want to say that if you don't do something now, there could be something else in 3 or 4 years, it makes a lot of sense.

When you think about all the kind of categories that you laid out in the 5 or 6 categories that you're thinking about from a M&A perspective, which of those are kind of must-haves...

Or I don't think any of our must as they're all adding additional value to our portfolio we have today. This HIT space, we're in it, the cardiovascular space, which we just did this deal, we really like that. There's great pathology there, large population sets that have need and there's amazing innovation. So that's 1 we're going to continue to stay close to and build additional competency in that space. As I think about neuromodulation, a lot of different technologies out there, a lot of opportunities, but that would be another space that I think we prioritize, that would be a great fit within our portfolio.

Is it more about kind of call point, the selling cycle of these assets? Or is it more about where the can market growth and opportunity longer term, how do you kind of evaluate it?

A few things. We start with that call point. Is there a problem that we can help solve with a customer that we know well or a customer that we're connected to. Next priority is culture is the right fit, is it built the right way, ethics is an economic model. Third, does it drive value? Is there an opportunity to grow the business in the TAM? Does it increase your WAMGR over time, these type of things. But you don't want to do a deal just solely on that. It has to fit these other buckets fit and customer first.

You're seeing your pipeline of deals that you look at and the valuations and sellers being more realistic on valuations?

Some, some for sure. It's amazing. I still talk to some that aren't I have to remind them, look at the public markets right now in med tech. But yes, I think there are some for sure that the valuations have shifted, and it creates maybe an opportunity for a different discussion.

I don't know, Jason or anything else that you wanted to -- and whether we didn't touch on.

No, I just really appreciate having us today. We're, again, grateful for all the support through the cyber incident, and we look forward to an impact for the rest of the year.

Great. I promise to get you out on time. So do -- thanks so much. Thank you.

Thank you. Appreciate it. Thank you. Thanks, everyone.