Release Date: July 30, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Stryker Corp (SYK, Financial) delivered strong organic growth sales of 9% in Q2 2024, with high single-digit growth across multiple segments including medsurg, neurotechnology, orthopedics, and spine.
- International organic sales growth accelerated to 8.9%, with notable strength in Europe, emerging markets, Australia, New Zealand, and Japan.
- The company completed the acquisitions of Artelon and MOLLI Surgical, enhancing their product portfolio in soft tissue fixation and breast cancer surgery localization, respectively.
- Stryker Corp (SYK) reported a quarterly adjusted EPS of $2.81, reflecting a 10.6% growth compared to Q2 2023, driven by strong sales and margin expansion.
- The company raised its full-year 2024 guidance, now anticipating organic sales growth of 9% to 10% and adjusted EPS of $11.90 to $12.10, reflecting strong capital backlog and innovative product portfolio.
Negative Points
- Foreign currency had a 0.9% unfavorable impact on sales, affecting overall financial performance.
- The neurovascular segment experienced a supply disruption related to flow diversion products, impacting US organic sales growth.
- Despite strong overall performance, the foot and ankle market has been softer, affecting the trauma and extremities business.
- The company faces challenges in maintaining margin targets amidst potential larger M&A deals and the need for significant margin expansion in the second half of the year.
- Free cash flow conversion has trailed in the first half of 2024 due to working capital changes, impacting overall cash flow performance.
Q & A Highlights
Q: Kevin, it's hard to not notice the quote in the press release about you're being excited about the product and M&A pipeline. So I'd love to hear your updated thoughts on M&A in 2024. You've talked about smaller deals in the first half and potentially larger deals in the second half. Is there any change to your view? And how should we think about the impact of larger deals on the margin targets you have for '24 and '25?
A: Yes. Listen, we're still committed to our margin targets of 200 basis points, roughly 100 basis points this year, another 100 basis points next year, and that is inclusive of M&A. We do have a very active deal pipeline. Most of them are in the tuck-in variety and most of them are not very large, but you continue to see us be active. As you've seen in the first two quarters of the year, much more active than we were last year. And we will be very active in the second half of the year. It's always hard to predict exactly which deals will end, as you know. But we're -- we have a very strong balance sheet now, given the debt that we paid down after Wright and Vocera, and we're going to put our balance sheet to work.
Q: Glenn, in order to hit the margin goal for this year, it requires a pretty big step-up in the margins in the second half. What are the drivers? Is it gross margin or OpEx? And what's your visibility?
A: Yeah, Larry. Really good question. I think if you look at our performance historically, you would always see that op margin leverage in the second half of the year just really, really takes off. And so I don't think this year is really going to be different from performances in the past years. I would tell you that we're seeing -- like you saw here in the first half of this year, kind of a good balance, honestly, between gross margin and SG&A. I think moving forward in the back half of the year, just given sort of how we spend in SG&A, our variable comp models, we'll probably see more leverage come out of SG&A than gross margin in the back half of the year. And we're very bullish on, like Kevin said, still holding to our 100 basis points of op margin expansion for this year.
Q: Kevin, you guys don't guide quarter to quarter. And I saw you, during the quarter, I know you've made a bunch of public comments. And the quarter came just in line versus the Street. Again, you don't guide quarterly. I understand that. But you did raise guidance for the year. So I was hoping you can reconcile in line versus the Street 2Q with the confidence to raise the guide, both on the top and bottom. And then the second question, I imagine part of that is also what you're seeing and the visibility you have into the capital equipment and procedure volume complex. Just maybe you could touch on that as well.
A: Yeah, sure. Thanks, Robbie, and thanks for remembering that we don't guide to quarters. We were actually very pleased with the way the quarter played out. We can kind of see our seasonality and how things are going to flow from quarter to quarter. We had a big Q2 last year, big comp. If you look at the back half of the year, we're very bullish on capital. We have a big backlog, particularly in endoscopy and in medical. We're also seeing very strong demand. As you've seen quarter after quarter, our Mako installations are very high. That leads to future strong demand for hips and knees, and July is off to a really strong start in joint replacement. We've also been able to achieve more price than we thought at the beginning of the year. And we expect that, that price tailwind will continue into the back half of the year. And lastly, I'd say the new products, the two big products we've talked about, Pangea and LIFEPAK 35, are both receiving tremendous positive feedback and really both had very negligible impact in Q2. But you're going to see those in a big way in Q3, Q4, and into next year. So a lot of tailwinds that are going to push our growth up in Q3. And certainly, Q3 is going to be a big one and also in Q4. So we're very confident of raising the guide. I love the fact that we have 10% at the high end of our growth coming off a year of 11.5% last year and 9.7% in the year before. So we are growing off big numbers, and we're feeling very good about the top line.
Q: Kevin, you have a new robotic platform in the US market with OR integration capabilities. I was just wondering, what are you seeing or hearing in the market currently? What impact do you expect it to have? And I guess, more importantly, I'm just trying to understand what efforts you have in place to better drive OR integration with your products longer term.
A: Yeah. Listen, we -- if you look at our portfolio, the new entrants that we're seeing, whether it's OR integration, whether it's new robots, we're really not seeing it having much of an impact at all in our business. We have great technology that's meeting the needs of what our customers want. And if you can see the type of growth we continue to post and the guidance that we're providing on what we see for future growth, we're not really concerned about what we're seeing. We like our chances. We believe we're on the right path with our technologies. There really isn't anything out there, at least right now, that is a cause for major concern for us to maintain our strong and high-growth organic profile.
Q: Kevin, just curious about how you're seeing -- if there's any difference, you're seeing from a market share perspective in the ASC versus outside the ASC for your -- both with the robot and the hip and knee implant. And I ask this question because I think one of the advantages of Stryker is just the breadth of the product offering in the ASC. So I just want to sanity check that with you.
A: Yes. Danielle, what I'd say is that if there is a big renovation or new construction, we do extremely well. So I don't want to speak on behalf of all ASCs, right? If it's already an ASC that's an orthopedic ASC and there is entrenched surgeons that are using competitive products, that's a little harder for us to displace. But if they're doing a big renovation or if they're doing new construction, we have a fantastic offense that wins at very, very high rates. And that's been one of the engines that's caused this tremendous growth for us in the ASC and why we continue to believe that that's the area where we're going to be laser focused. And that's the area where we are winning today, and that's the area we're going to continue to win in the future. So it's not necessarily all ASC but definitely,
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
