Stryker Corporation (SYK) Earnings Call Transcript & Summary

Welcome back. I'm Larry Biegelsen, the medtech analyst at Wells Fargo, and it's my pleasure to host this fireside chat with the management team from Stryker. With us, we have Preston Wells, the CFO; and Nick Mead, Vice President of Investor Relations. The format is going to be Q&A. So we'll jump right in.

Preston, no surprise. We're going to start with a question on the second half ramp. Just talk about your confidence and the visibility into that and ability to meet the guidance, which I think is 8.8% at the midpoint for organic growth.

Yes. So first of all, thank you for having us. We appreciate the opportunity to be here. Apologies for being a little bit late. There's a logjam at the elevator. Maybe a couple of comments as we think about the second half of this year and kind of where things have progressed. So we gave our guide, 8.3% to 9.3%. So you're right, the midpoint of 8.8%. And the reason we give a guide, obviously, with a range is to anticipate a range of outcomes. One of the things we talked about in the second quarter call was our peripheral vascular business and some of the challenges that we were seeing on the PV business. I think during the call, we talked about the manufacturing issue that's not allowing us to reach a full supply of inventory at all of our customers and quite frankly, not allowing us to go out and really win new business. We anticipated that, that would rectify itself in the third quarter. What we're seeing is that is continuing into the third quarter and certainly, it will continue. We expect it to continue a little bit into the fourth quarter as well. So a little bit of a different nuance to what we originally anticipated is that peripheral vascular isn't quite seeing that same recovery that we would have expected from a supply standpoint. And so it's just a matter of us continuing to work on generating supply for the rest of the year to continue to support customers. The other thing I would probably point to as we think about a couple of the soft spots that we saw in the second quarter was on the joint replacement business. Our hip number in the second quarter, we talked a little bit about. We did expect and we saw a very strong June, and we expected to see some better recovery actually of that business in that market in the summer months. But what we actually are seeing is a bit more of the seasonality that we would typically see. And so we didn't see -- with that seasonality, we actually did not see the recovery that we expected so far in the quarter, although we are anticipating to have a better September, certainly a little bit slower than anticipated from a joint replacement standpoint in the second quarter. So that is some of the elements that continue to be pressures on our business. We do see really strong capital demand for our capital products. We highlighted that coming out of the second quarter. That remains really strong. Our backorder remains really strong. The order book remains strong for those capital products. And also in our Trauma and Extremities business, that business remains really, really robust as well and growing much faster than market. So again, the range of outcomes that we provided is really because there's a lot of different things that are happening. The cyber event earlier in the year certainly exacerbated that, put a lot of pressure on our second half, as you all very well know. And so we're seeing some variation maybe to some of the things that we expected, while we continue to see really strong demand on our capital business.

That's helpful. Just a couple of follow-ups. So I don't have numbers in front of me, but on peripheral, remind us of what Q2 was and how we should think about that business going forward?

Yes. So maybe we reported at a vascular level. I think on the earnings call, I talked to it in terms of our U.S. business, and our U.S. business was negatively impacted on the peripheral side. I think on the call, somebody asked about what the impact on the growth rates were. I think they estimated 70 to 80 basis points on the quarter, and I said that's about right. I think that, that expectation is continuing into the third quarter that, that peripheral business won't be as healthy as what we would have expected. I think Kevin said that we expected to get back to growth in the quarter. And as of right now, that's still challenged based on our supply challenges that we have. And the ability, quite frankly, to maintain enough inventory in the system that we can support kind of not only the existing customer base, but quite frankly, get out and grow a new customer base. Maybe as I think about peripheral in general, as we talked about at the end of last year, we obviously had some sales force execution things that we were working through as we were kind of bringing the sales force up to a Stryker standard. We got that to a point in the first quarter that we felt really good about where that was headed only to have the cyber event and maybe to put a little bit more on that cyber event. So when the cyber event happens, we talk a lot about it. We took all our manufacturing down or our manufacturing was taken down for several weeks. We brought that back up. And for all of our existing businesses, it's just a process of restarting, you restarted back on the processes that you have and you just -- you're off and running. On the peripheral side, and I think this happens a lot when you have a smaller organization quite frankly, is growing very rapidly. As you can imagine, there's a lot of process things that have to still get improved as that business is able to ramp and scale. And so as we think about integrations for us and we integrate manufacturing, you're always going to run into some things over time. And quite frankly, you fix those things kind of one-off as you find them and you just continue to move on. They're not that disruptive to the overall business. In this case, when we brought manufacturing all the way down to a full stop and then you have to bring it back up, all of those process-related opportunities or challenges present themselves all at the same time. And so to work through some of those elements and get things back up to a process standard that we want it to be for Stryker, it's just taken us a lot longer to get that back to full capacity to the point where we're able to produce all the different SKUs that are required in enough fashion, like I said, to support the inventory requirements of the existing customers, which we are prioritizing our existing customers and supporting procedures, but it's really inhibited our ability to try to get out with new customers as well. So a lot of work to do to make sure that we get inventory levels to where they need to be, and the team is heavily focused on doing so. Our expectation entering the quarter was that it would be a bit faster than maybe what it has been so far.

So the 70 to 80 bps that you mentioned, that was total Stryker.

That was total Stryker in the second quarter was -- I said it was a pretty good estimate.

And so similar in Q3 -- Q4? Are you saying that you think there's some improvement?

We're not saying anything yet on Q4. Certainly, as we get into our Q3 earnings call, we'll have a better sense of how that's doing. I mean it's a really dynamic time in terms of trying to understand how that's happening because there's a little bit of fits and starts as you go through it. I would just say for now, we do anticipate the third quarter to be very similar to second quarter in terms of the impact of PV on the growth rate.

And some procedures are still being -- it's not like...

Yes, we're not -- procedures are still being done. So we're working to prioritize, let's call it, our top 100 right now as we try to make sure that they have enough inventory to continue to do procedures moving forward. So -- but it's not 100% where it needs to be. So inventory levels aren't 100% where they need to be all the time to do that. So we're still working on trying to make sure that we're supplying enough inventory into the field to support existing. But certainly, we're not able to do all of our customer base and certainly not able to grow new customers at this point in time. So it's something that we're working to get rectified as soon as possible.

And I know it's really early, but can this business bounce back in '27?

Absolutely. So we feel really good about the market. So the market itself is a great market. There's still a significant opportunity to move patients from nonmechanical thrombectomy to that. And so there's a -- we have a PEERLESS II study, which we've talked about before, which is really focused on how do we show the benefits of this procedure on the marketplace. And we expect that to happen sometime in the second -- in next year, which will really hopefully help really drive more of this market from a total market standpoint. We feel really good about where we got the sales force to kind of leading into the cyber event. And so that team is being maintained and trained and ready to go. And it's not a product issue. It's really a supply issue that we are working hard to rectify. And we feel like after we get that rectified from a supply standpoint with the commercial team that's ready to go, that they'll be off and running. So there's still a lot of great opportunity in this space. That combined with the recent AVS acquisition and getting into the IVL space, which we expect to have that product approved towards the back end of this year, I think, gives us a lot of momentum and a lot of reason to believe for 2027.

And share loss, I mean if this certainly...

Yes, certainly, share loss is happening. I mean this is an emergent procedure. And so if you're not there to do the procedure, you lose the procedure. So short term-wise, there's certainly some impact on share. But again, we expect that as we get things back from an overall supply perspective, combined with the sales force that we've revamped along with the AVS offering over into next year that we'll be able to bring share back. Also with the fact that the category itself continues to expand. So there's growth opportunity while we still regain share to do both of those things.

And then on hips, the issue in Q2 was the international hip business primarily. Is that what you're talking about right now?

Yes. So maybe let me talk about the whole joint replacement market as we think about. So hips in general was a little bit more depressed in the second quarter. I think in general, that was driven by the fact that Europe was more depressed, and we do over-index in Europe. I think what we're seeing is a couple of things as we headed into the third quarter. So number one, on the hip side, we still see Europe as being challenged. So I think there's a lot of things that are happening in the European space. So not only as we think about how public health is being funded versus defense in some cases, we see strikes that are impacting our ability to do some things in that space. The war certainly has had some impact. So overall, there's been some impact on that market. That market for the year has been pretty soft across joint replacement in general, where we over-index on hips, we certainly see a bigger impact. What we're also seeing as we think about the U.S. market is we expected there to be a stronger summer in the U.S. So we had a really strong July, and this would apply to both hips and knees -- I'm sorry, really strong June. And then we expected July and August to kind of continue with some of that market acceleration. I think what we've probably seen though is more of what I would call the normal seasonality on July and August thus far, which was kind of more patients from a vacation standpoint, more surgeons from a vacation standpoint. We've also heard some different things in the marketplace as well around just a longer waiting list, longer lead times for people to get procedures done. Certainly, as patients become more aware of inflation and things like that, we're certainly hearing some acute stories about folks that aren't getting certain procedures done right now. So we do feel like there's some building of demand in the system, but we would have expected to see a bigger number coming through for us in July and August that we, quite frankly, did not see. We generally, as part of that seasonality, see a bigger September, and that's one of the things that we're looking at right now, but certainly a little bit slower than what we anticipated leaving the second quarter.

Okay. So it's ortho overall...

Ortho overall. Hips, we're feeling a bit more acute on because of some of the challenges we have in Europe. I think the other thing from a competitive standpoint, we're still looking at -- one of the things we don't have on the hip side is the hip impactor. And so I think that's one of the things certainly that we're feeling from a competitive standpoint. But overall, as we think about Mako, we think about the Mako offering and our ability to win behind Mako, that continues to be true, and we see that on the knee side for sure. We see it a little bit less on the hip side right now, but certainly that overall, that -- our ability to win behind Mako still remains a very positive thing.

What's the timing on the hip impactor because I know you have it.

It's something that we're looking at for -- hopefully, into next year, we'll be able to have something that they will be ready to go.

And in ortho, so obviously, there's been concerns about deferred procedures because of the ACA subsidies expiring. How much do you contribute to?

I don't think ACA itself is what we're seeing. When we talk to folks and we look at some of the market data that's happen, ACA itself, I don't think is having as big of an impact. I think there are some other elements that are at play. Certainly, the general consumer sentiment in terms of just higher inflation, higher prices that people are paying, I think has folks just generally kind of nervous about just taking time off of work or actually being -- having downtime or spending money on a procedure in the short term. I think the other thing that we are seeing, we are seeing some elements that have to do with insurance and how insurance is playing out, a lot more pre-approvals that are happening. Certainly, the deductibles are growing on folks. I think just the amount of money that people are having to spend to get procedures done is changing. I think all of those things are leading to a little bit of a consumer challenge. Now it's not changing the rate of requirement for these procedures. And so certainly, there's demand that's building in the system that we feel like at some point is going to release. But certainly, one of the things that we're hearing coming through the summer was some of those more anecdotal comments for sure.

And if I go back to the cyber attack, we estimated you were impacted by, call it, $350 million. You know where those numbers come from, even though you guys haven't disclosed that ballpark. And you -- except you kept the guidance the same. My question is, outside of the peripheral, outside of the ortho market being a little softer, the catch-up, if you will, from the cyber attack, a lot of that was capital. So it's not ortho, it's not peripheral. How is that playing out relative to expectations?

Yes, I would say that is much more in line with expectations. So the capital businesses themselves remain really healthy. Certainly, demand remains robust. We're certainly seeing our order book is elevated. We've seen strong orders throughout the year. So when we gave our guide at the end of Q1 and certainly in Q2, a few things were at play. At the end of Q1, there was just a lot of messiness to really understand what kind of the future might hold. But what we did see is that really strong order book continue to come in. So we saw really strong orders. We saw really strong orders in Q2, really strong capital business results in Q2, and that has continued to happen. So the demand piece remains really strong. On our side, it was really about how can we ramp production to meet that demand in the short term. And so on a business like medical, for example, where we're seeing really good orders for our bed business, it was about adding another shift. So that shift has been added. They're ramping production on a daily basis to meet this increased demand on that business. So similarly, we're seeing that play out in many of our other capital business as well. So I would say on the capital side, that has played out about how we would have expected it to coming out of the cyber event. The other business I would probably highlight, Larry, on that one, too, is Trauma and Extremities. So the trauma business has continued to perform very, very well. So something that was, again, an emergent procedure even during the incident. We had inventory on the shelf in the consignment locations that consignment was able to be used. Those procedures were able to be done, and behind Pangea and our Upper Extremities business, in particular, that business continues to perform at a really, really high level as well. So outside of those 2 soft areas that we talked about, the rest of the business is doing about what we would have expected it to do.

Back to the Recon business, is there any way -- you quantified on the peripheral side in vascular, the 70 to 80 bps or gave some helpful color. Is there any way to talk about the order of magnitude of softness that we're seeing in ortho?

No. I think -- again, I think everybody has the numbers in the second quarter of kind of what's happened. The ortho business this year has been really interesting and hard because I think there's a lot of dynamics that are happening. You look at just the competitive set of what's going on there. So obviously, we had our cyber event, which completely disrupted Q1 from a market perspective. You have one of our competitors is separating from its parent. Another one is changing its sales force. Another one is launching new systems. It's just a really weird dynamic of a lot of different things that are happening. So I think everybody kind of saw what the market was in Q2 when you had finally everybody presenting their numbers in a more normal fashion, I guess, I would say. So I think you could probably come up with some estimates based on that. But I would say it's just been a very interesting dynamic with all the change happening across the competitive set.

And how do you feel about maybe in ortho, just looking ahead, your ability to still grow 200 to 300 basis points above market?

Yes. So I think there's going to be some short-term things that we're seeing, short-term things from an environment perspective, short-term things from a competitive perspective. But I think longer term, and what we've said is we expect that market to grow mid-single digits, which for us is 4% to 6%. It's likely on the lower end of that 4% to 6% -- but we believe very much in our technology. We believe very much in Mako and quite frankly, now Mako RPS. And what that enabling technology has done over the last 10 years, we believe that we have that ability to continue to accelerate moving forward. Why do I say that? I think there's a couple of things. I think number one, when we continue to look at the opportunities for Mako in the U.S., they're still there. They're still there, not only in terms of systems and units, but also there in terms of as we think about the software. So just this year, on Mako 4, when we launched a new hip software that allows us to do revision and complex hip. And so that gives us more opportunities to bring in new hip users. When we think about outside the U.S., we're kind of at that point where we hit the inflection in the U.S., outside the U.S. now where we have enough Makos there. There's enough of the software there that we're starting to see the ramp of joints that are going in with Mako, kind of like we saw in the U.S., probably what I would say, 5 to 6 years ago, where we're starting to see that really grow. And then now you add to that, particularly in the U.S. next year, Mako RPS. So we've hit full launch on Mako RPS. We're getting more of that out into the marketplace. And that's allowing us to really go after a segment of the market, quite frankly, that we hadn't been able to really touch before, where you have a manual user who wants to do a more robotic procedure, but in a fashion that's more similar to their manual procedure -- what Mako RPS does is it gives that user an opportunity to get some of the benefits of a robotic procedure, but not change their workflow so significantly. So on the back of all of those things, Larry, we feel really, really good about our ability to continue to take share over the next several years. And certainly, as we add hip impactor, that just adds to our portfolio. Triathlon Gold, another one that adds to our portfolio that fills a need for a metal allergy knee that we didn't have before. So all of those are just elements that allow us to believe that we're going to continue to outpace the market overall. Certainly, with some short-term disruption, like I said before, from some of the economic type things that are going on as well as just some of the competitive changes that are happening. But longer term, we really believe on our ability to continue to do that.

So sorry for jumping around.

Yes. Go forward.

A few curveballs here this morning. But I wanted to go back to 2026. Is there any way to quantify the overall impact? I mean you have guidance of 8.3% to 9.3%. I got to ask, I mean, should we just assume kind of low end of the range? I mean, EPS implications? Is there any helpful color you can provide today?

Yes. So we'll certainly give you a more wholesome update at our quarterly call. What I would say is there's obviously assumptions out there right now around consensus. There's certainly what we've provided in terms of our guide. And we're not ready to change the guide. What I would say is though, there have been -- as I mentioned before, there's been 2 big kind of changes as we think about what our assumptions were and certainly our ability to recover on PV in the quarter as well as a little bit slower of joint replacement market are 2 elements that are very different than what we thought about as we headed into the quarter. So we're not ready to change the guide in terms of what the numbers are quite yet. But certainly, there are some elements that are different -- that being said, it's been a dynamic year, obviously, with recovery. We talked about some of the other businesses that are doing very well. And so those are really doing a lot of work as well and performing very strongly, but certainly some things that we're working through with the variability over the next month or so, and then we'll certainly provide a more detailed update.