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Edited Transcript of SYK earnings conference call or presentation 25-Apr-17 8:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 Stryker Corp Earnings Call

KALAMAZOO May 31, 2017 (Thomson StreetEvents) -- Edited Transcript of Stryker Corp earnings conference call or presentation Tuesday, April 25, 2017 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Glenn S. Boehnlein

Stryker Corporation - CFO and VP

* Katherine A. Owen

Stryker Corporation - VP of Strategy & IR

* Kevin A. Lobo

Stryker Corporation - Chairman and CEO

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Conference Call Participants

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* Anthony Charles Petrone

Jefferies LLC, Research Division - Equity Analyst

* Brent Peter Williams

D.A. Davidson & Co., Research Division - Research Analyst

* Craig William Bijou

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* David Ryan Lewis

Morgan Stanley, Research Division - MD

* Frederick A. Wise

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Joanne Karen Wuensch

BMO Capital Markets Equity Research - MD and Research Analyst

* Jonathan Preston McKim

Piper Jaffray Companies, Research Division - Research Analyst

* Joshua Thomas Jennings

Cowen and Company, LLC, Research Division - MD and Senior Research Analyst

* Kaila Paige Krum

William Blair & Company L.L.C., Research Division - Research Analyst

* Matthew Charles Taylor

Barclays PLC, Research Division - Director

* Matthew Jess Keeler

SunTrust Robinson Humphrey, Inc., Research Division - Associate

* Matthew Stephan Miksic

UBS Investment Bank, Research Division - Executive Director and Senior Research Analyst

* Michael N. Weinstein

JP Morgan Chase & Co, Research Division - Senior Medical Technology Analyst and Head of Healthcare Group within Equity Research

* Richard Newitter

Leerink Partners LLC, Research Division - MD, Medical Supplies and Devices and Senior Analyst

* Robert Adam Hopkins

BofA Merrill Lynch, Research Division - MD of Equity Research

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Presentation

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Operator [1]

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Welcome to the First Quarter 2017 Stryker Earnings Call. My name is Crystal, and I will be your operator for today's call. (Operator Instructions) 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, Chairman and Chief Executive Officer. You may proceed, sir.

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Kevin A. Lobo, Stryker Corporation - Chairman and CEO [2]

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Welcome to Stryker's First Quarter Earnings Call. Joining me today are Glenn Boehnlein, Stryker's CFO; and Katherine Owen, VP of Strategy and Investor Relations. For today's call, I'll provide opening comments, followed by Katherine, with an update on MAKO. Glenn will then provide additional details regarding our quarterly results, before we open the call to Q&A.

Our Q1 sales performance underscores the strength of our businesses, with organic sales growth topping 8%. We had 1 extra selling day, which contributed approximately 1 percentage point of growth. While the sales performance was strong across the organization, MedSurg was a standout, delivering organic growth of 10.8%, as new products and sales force execution drove market share gains.

The Orthopaedics and Neurotech and Spine segments were solid in the quarter, posting organic sales gains of 7.2% and 5.3%, respectively. On a geographic basis, growth was 7.6 in the U.S., while OUS delivered gains of 9.9%. OUS growth was driven by strong performances in Europe, Canada and Australia. Acquisitions contributed roughly 10.6% to Q1's growth, recognizing the previously discussed factors that impacted Physio's first quarter performance, while lingering recall challenges limited Sage's growth. We remain confident in the underlying strength of both Physio and Sage and expect them to be back on track for the balance of the year.

Our particularly strong top line performance allowed us to make key strategic investments and sustain healthy R&D spending. Adjusted per-share earnings increased approximately 19%, topping the high end of our range at $1.48 per share. Looking ahead, our Q1 results reflect strong momentum and support of our ongoing strategy of investing in focused sales teams, internal innovation and acquisitions. We are highly confident in our ability to deliver on our full year targets, and once again, grow sales at the high end of med tech with leveraged earnings.

With that, I will now turn the call over to Katherine.

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Katherine A. Owen, Stryker Corporation - VP of Strategy & IR [3]

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Thanks, Kevin. My comments on today's call will focus on MAKO. During Q1, we installed 18 robots globally, of which 11 were in the U.S. We also continued to upgrade existing robots in the field, a process that is ramping nicely, and we expect will continue to 2018. As many of you on the call are aware, following a highly focused limited launch, we initiated the full commercial release of the total knee at last month's AAOS meeting. Since the launch, we have trained over 200 surgeons on the TKA application at roughly 90 different locations. We have 40 training locations in the U.S., with another 5 OUS, which is helping drive volumes of MAKO TKA procedures, which are accelerating monthly.

We remain focused on ensuring a highly successful MAKO TKA launch, with outcomes that we believe will benefit our customers and patients. The feedback from surgeons has been very positive, and we believe this underscores the methodical approach we took as part of the limited market release in order to optimize the user experience. For those of you at the recent AAOS meeting, the excitement around the MAKO TKA application was apparent at our MAKO surgeon event, which was attended by 1,600 health care professionals, many of whom also attended the 25 MAKO TKA demonstrations conducted over the course of the academy meeting.

We believe the excitement around the TKA application will be evident in our knee market shares, which, while already outpacing the market, we continue to expect even greater share gains as we exit 2017.

With that, I'll now turn the call over to Glenn.

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Glenn S. Boehnlein, Stryker Corporation - CFO and VP [4]

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Thanks, Katherine. Today, I will focus my comments on our first quarter financial results and the related performance drivers.

We have provided our detailed financial results in today's press release. Our organic sales growth was 8.2% in the quarter. As a reminder, Q1 included one more selling day, which has the impact of adding roughly 1% in growth. Keep in mind that the selling days generally do not have an impact on the performance of our capital businesses.

Pricing in the quarter was unfavorable 1% from prior year, while foreign currency had an unfavorable 0.4% impact on sales. Both U.S. and international sales continue to demonstrate strong momentum, with first quarter organic growth of 7.6% and 9.9%, respectively. Both geographies benefited from the extra selling day.

In the U.S., there were strong performances across Orthopaedics, MedSurg & Neurotechnology. International sales growth demonstrated solid gains in Europe, Canada and Australia and benefited from favorable emerging market comparables.

Our adjusted quarterly EPS of $1.48 increased 19.4% from the prior year, reflecting strong sales growth, accretive acquisitions, operating expense control and the benefit of the change in accounting guidance for tax benefits from certain stock compensation expenses now included in our tax provision. Our first quarter EPS was negatively impacted $0.04 by unfavorable foreign currency exchange rates.

Now I will provide some highlights around our segment performance. Orthopaedics delivered constant currency growth of 7.8% and organic growth of 7.2%, including organic growth of 7.4% in the U.S. This performance was highlighted by positive performances in knees at 7.2% and Trauma and Extremities at 8.7%. The primary drivers of performance in the quarter included strong demand for our 3D-printed products, our Foot & Ankle portfolio and our MAKO platform.

Orthopaedics international delivered organic growth of 6.8%, with solid performances in Europe, Canada and Australia. MedSurg continued to have strong performances across all businesses in the quarter, with constant currency growth of 36.6% and organic gains of 10.8%, which included a 9.6% increase in the U.S. Instruments had a good performance coming off a strong order book in Q4, with U.S. organic sales growth of 7.8%. This included continued momentum related to its Neptune waste management business.

Additionally, Instruments also shipped initial units of its newest power tool product line, System 8. Endoscopy delivered U.S. organic sales growth of 14.3%. This reflects strong demand for its video platform, booms and lights and sports medicine products. The Medical division had U.S. organic growth of 6.4%, driven by its core beds structure and power cot products. As discussed previously, Physio's results were impacted by a tough quarterly comparable that included the legacy company's fiscal year-end. As such, Medical's Physio business was down 18% on a comparable basis.

Medical Sage business grew 3%, which was below our expectations and primarily related to the ongoing recovery from last year's product recall issues. This resulted in some interruption of supply to customers. During the quarter, Sage continued to work through resupplying these customers and anticipates a full recovery by the end of the second quarter. Both Sage and Physio acquisitions anniversary in the second quarter, and we continue to anticipate that they will be accretive to our earnings, as previously guided.

Internationally, MedSurg had organic sales growth of 15.7%, which reflects strong European and Australian sales and some easing of the MedSurg comparables in China. Neurotechnology and Spine had constant currency growth of 7.7% and organic growth of 5.3%. This growth reflects continued strong demand for our Neurotech products, offset by softness in our Spine business. Our U.S. Neurotech business posted growth of 9.7% for the quarter, highlighted by continued strong demand for our ischemic stroke products, CMF products and our Neuro Powered Instruments.

Our Spine business in the U.S. continued to see the residual impact of supply issues. We expect some easing of these issues in the second quarter. Internationally, Neurotechnology and Spine had organic growth of 9.8%. This performance was driven by continued strong demand for our Neurotech products in Europe and Asia.

Now I will focus on operating highlights in the first quarter. Our adjusted gross margin of 66.5% was down 150 basis points from prior year quarter, but up 20 basis points sequentially from the fourth quarter of 2016. As compared to the prior year first quarter, gross margin was unfavorably impacted primarily by acquisitions as well as business mix and foreign currency.

Our adjusted SG&A was 35.8% of sales, which was 160 basis points favorable to the prior year quarter. This improvement reflects favorable leverage from business mix, including the impact of leverage from acquisitions and continued focus on our operating expense improvements through our cost transformation for growth program. This favorability is primarily offset by continued planned investments in our CTG program, our ERP project, and certain expenses related to launching our MAKO TKA platform.

R&D, with spending at 6.5% of sales, continues to reflect our commitment to innovation. In total, adjusted operating expenses were 42.3% of sales, which was 150 basis points favorable to the prior year quarter. With a strong top line momentum, we anticipate continuing to make investments related to CTG and MAKO in the second quarter as we execute these programs to drive longer-term share growth and leverage.

In summary, our adjusted operating margin was 24.2% of sales and essentially flat to the prior year quarter. Our operating margin reflects good leverage, offset by key investments related to driving future operational savings and product growth platforms. We remain confident in our ability to deliver on our full year commitment of driving 30 to 50 basis points improvement in our operating margin.

Lastly, I will provide some highlights on other income and expense. Our other expenses increased primarily due to higher net interest expense associated with increased acquisition-related borrowings that were not outstanding in the prior year quarter. This is partially offset by increased interest income. Our first quarter adjusted effective tax rate of 15.3% reflects an underlying operating tax rate of 18%, offset by a 2.7% benefit related to the adoption of the changes in accounting for stock compensation expenses. As a reminder, the first quarter includes the bulk of the benefit of this accounting change, and moving forward, we would anticipate an effective tax rate closer to 17%.

Focusing on the balance sheet. We continue to maintain a strong position, with $3.3 billion of cash and marketable securities, of which approximately 85% was held outside the U.S. Total debt on the balance sheet at the end of the quarter was $7.2 billion.

Turning to cash flow. Our first quarter cash from operations was approximately $151 million. During the quarter, we completed a $230 million share repurchase, which will offset the impact of dilution in 2017.

And turning to Q2 guidance. We reaffirm our expectation of organic annual sales growth to be in the range of 5.5% to 6.5% for 2017. As a reminder, Q2 and Q3 will have 1 less selling day as compared to 2016, and Q4 has the same number of selling days.

Finally, for 2017, we reaffirm that our adjusted net earnings per diluted share will be in the range of $6.35 to $6.45 for the full year. For the second quarter, we anticipate adjusted net earnings per diluted share in the range of $1.48 to $1.52, which includes the aforementioned investment, foreign currency impacts and the impact of the accounting change for stock compensation.

I will now open up the call for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from David Lewis from Morgan Stanley.

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David Ryan Lewis, Morgan Stanley, Research Division - MD [2]

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Maybe, Kevin, one for you, and then, maybe, one on MAKO. So Kevin, just thinking about the strength in the first quarter, obviously, even adjusted for the selling day. Your organic growth is in excess of the top end of your guidance range for the year. So can you just talk about how you see the pacing for the balance of the year? I mean, is there any factors you could point to that would drive deceleration based on the sort of very strong start to the beginning of the year? And then, I have a quick follow-up.

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Kevin A. Lobo, Stryker Corporation - Chairman and CEO [3]

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Sure. Thanks, David. After Q1, we are, obviously, very happy with how our businesses have performed, and the momentum in the business that we have. Keep in mind, as Glenn mentioned, we have 1 less selling day in each of the next 2 quarters, and we did start out the year with the higher top line targets and a tighter EPS range than we did in the prior year. So at this point, we feel great about the guidance we have out there. Let's see where we are at the midpoint, before we think about adjusting our ranges. But I would say there's nothing out there that I'm worried about. The business momentum is very strong across our portfolio.

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David Ryan Lewis, Morgan Stanley, Research Division - MD [4]

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Okay. And then, Kevin or others, just thinking about MAKO, post-AOS, our sense is that went at or better than your expectations. So how would you characterize, sort of post the meeting, training backlog of systems or receptivity? And are you still as confident as you were before that we start to see some share movement towards the latter half of this year?

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Katherine A. Owen, Stryker Corporation - VP of Strategy & IR [5]

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Yes. Thanks, David. I would say, absolutely, the AAOS launch really publicly exceeded our expectations; 1,600 health care professionals at our MAKO event. But more importantly, I think the interest around the demonstrations and follow-up from surgeons who wanted to get better educated and understand. I'm really pleased with the robots that we installed in the quarter, with that same sales force upgrading systems in the field for the total knee application. So we feel really good about the rollout, the pace we're on. We've tried to be very methodical in approaching the full commercial launch, but with 40 training sites and over 200 surgeons trained and the volumes building monthly, we feel really good about the launch and the rollout for the year.

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Kevin A. Lobo, Stryker Corporation - Chairman and CEO [6]

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Yes. David, I'd just add, our orthopedic team did a spectacular job at the AAOS meeting. And I even had tremendous feedback from surgeons from outside of the United States, from Asia, from Europe. And so I think you're going to see MAKO pick up around the world. Obviously, the U.S. is going to be the biggest market. But as you saw, even in the first quarter, we sold quite a lot of robots outside of the United States. So the meeting was a huge success. We feel very bullish about the TKA application of MAKO.

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Operator [7]

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And our next question will come from Mike Weinstein from JP Morgan.

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Michael N. Weinstein, JP Morgan Chase & Co, Research Division - Senior Medical Technology Analyst and Head of Healthcare Group within Equity Research [8]

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Let me start with just one MAKO question, because I know you're not going to disclose the number of system upgrades that you're going to do on a quarterly basis or the percentage of your installed base that is upgraded, but that's probably the metric that is most interesting to us. So can you give us some insight into where you think you are relative to your plan at this point, or your expectations going into the year on the percentage that you have upgraded at this point?

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Katherine A. Owen, Stryker Corporation - VP of Strategy & IR [9]

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Yes. Thanks, Mike. We feel really good about where we are. We're pacing. We started doing the upgrades in the fourth quarter. They're continuing to accelerate sequentially. We think the process and the vast majority of those robots in the field are going to get upgraded, and that's a process we think will take us through next year. Part of the challenge is, honestly, bandwidth, because we have the same capital sales force that we're trying to expand. But they're doing the upgrades, they're doing the new installs. So it's managing the demand out there. But we feel great about the momentum we're seeing, the level of interest, and we would expect those upgrades to continue to build.

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Michael N. Weinstein, JP Morgan Chase & Co, Research Division - Senior Medical Technology Analyst and Head of Healthcare Group within Equity Research [10]

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Okay. And then, the commentary on different parts of the MedSurg business, I was hoping you could just spend another minute on, a, on the plus side, I was struck by how strong the Endo business was this quarter. Both U.S. and internationally was exceptionally strong. And I think we have some good understanding of why that is. And then, b, I did the comps and for Physio were harder, I think, than discrete necessarily appreciated. So that was a bit more challenging. Could you just level-set expectations on Physio after this quarter?

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Katherine A. Owen, Stryker Corporation - VP of Strategy & IR [11]

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Yes. So you're correct on Endo. We're near to the 1588 launch, and as you've heard us talk about before, and you know well, those will tend to be multiyear launch, and Q2 is typically a very strong year. But they're also seeing very good momentum with booms and lights and the sports medicine business, which continues to see really nice growth, smaller base, but really pleased with the performance there. Physio, yes, we had talked previously about the difficult comps, given really robust first quarter of the year ago, compounded by the fact that it wasn't part of us, and that was their prior fiscal year-end. And as you know, capital businesses tend to be the strongest in the fiscal year-end. So we did expect this quarter to reflect those trends. We feel really good about the momentum in that business as well as Sage, which we also expect to be back to a normalized run rate in Q2. So it's really limited to a Q1 event that was much more to do around the comparisons as opposed to anything underlying in the business.

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Operator [12]

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And our next question comes from Bob Hopkins from Bank of America.

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Robert Adam Hopkins, BofA Merrill Lynch, Research Division - MD of Equity Research [13]

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I just want to continue that line of questioning on Sage and Physio. So do you guys still expect at this point the same kind of EPS accretion that you talked about previously and for these deals to also be accretive to growth?

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Glenn S. Boehnlein, Stryker Corporation - CFO and VP [14]

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Yes. Bob, as we look at the forecast for both of those businesses, first of all, as Katherine explained, we did anticipate that Physio would be down, just given the comparable and prior year. Sage, maybe, is ramping a little bit slower than we had thought, just because of the product recall and getting that product back to customers. But for the full year, we're still committed to the guidance we provided of the $0.15 to $0.18 per share, and the growth will be accretive for the full year when we get to the end.

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Robert Adam Hopkins, BofA Merrill Lynch, Research Division - MD of Equity Research [15]

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Okay. And then, for my second question, just to stick with MAKO and kind of expectation setting. Given that you're providing a net number, how should we think about that over the course of the rest of the year? Should we think about it in terms of steady year-over-year improvement as far as the net number? Because, obviously, that's a number that's going to get a lot of scrutiny. I think you placed 86 last year. Is it reasonable to expect a pretty nice uptick this year from a net perspective? I was wondering if you could just sort of set expectations for that net placement number that you give us.

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Katherine A. Owen, Stryker Corporation - VP of Strategy & IR [16]

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Yes. So I think we haven't guided to a robot number. I think you should assume, while the net number will grow year-over-year, it won't be at the same pace that you've seen from a growth rate perspective as the base has gotten a lot bigger. And also keep in mind that that's only part of the story now. So while we'll continue to report, like this quarter, the 18 robots installed, just as importantly is that sales force out there doing the upgrade of the fleet, which as you know, easily exceeds 300. So the combined force of that, which is all recorded in that other recon revenue line, but it really is both of those. So yes there'll be year-over-year growth in robots installed. But on top of that and really driving a lot of the power of the ability to take market share gains, is a number of installations and upgrades that we're doing.

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Kevin A. Lobo, Stryker Corporation - Chairman and CEO [17]

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And just to add, Bob, I think we're really encouraged by the knee growth rate. As you recall, last year, we had a very strong first quarter in our knee business. And on top of that, we grew very well again this quarter. So our knee business has had multiple quarters in a row of growing higher than the market, and we expect that to continue.

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Operator [18]

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And our next question comes from Rick Wise with Stifel.

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Frederick A. Wise, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [19]

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I want to return to the knee growth as well. You said, obviously, knee growth, knee share already outpacing the market, and you expect more. Just trying to -- just looking at it, worldwide numbers, the first quarter, up 7.2% against the easy comp, but very much in line with fourth quarter growth. When we think about, I mean, is 7%-plus, is that the kind of growth we should be thinking about the franchise as we look at for the rest of the year, even though you have a tougher comp in the second quarter, given some of the momentum you're talking about, Kevin?

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Kevin A. Lobo, Stryker Corporation - Chairman and CEO [20]

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So I'm not sure the comp reference that you're making, Rick, because if you look at last year's first quarter, our knee business in the U.S. was 9% growth. So our...

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Frederick A. Wise, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [21]

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Okay. I'm sorry. I might be looking at the wrong number.

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Kevin A. Lobo, Stryker Corporation - Chairman and CEO [22]

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Yes. If you're looking at 7.4%, we grew that off of a 9% in the prior year. So we're feeling great about the knee business. It's gaining momentum. And really, once the total knee, really, that application and those upgrades take hold and the surgeons have a good experience, that's locked in market share gains. The more surgeons do and the more that they enjoy that procedure and see the benefits of the procedure, that becomes a locked-in market share. So we expect the momentum to continue, and we had a really outstanding first quarter, if you consider that comparison.

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Frederick A. Wise, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [23]

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Exactly. And you talked about making more MAKO investments. I mean, maybe help us understand what that's going to encompass specifically, I think, you said in the second quarter. Obviously, you understand the continuing investment in sales or there's an upgrade in training, but is there anything over and above that, that we should be thinking about?

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Katherine A. Owen, Stryker Corporation - VP of Strategy & IR [24]

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No. It's -- as Glenn referenced, given the strong start to the year, momentum we were seeing, there was an opportunity to make some strategic investments in a few areas, CTG, ERP, that had been anticipated as well as MAKO as we've been really pleased with the rollout. But there's, obviously, always opportunities, where, if there's investment dollars available that can help drive longer-term growth, we want to take advantage of those. So nothing I'd call out in specifics, other than really supporting the overall MAKO TKA launch.

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Kevin A. Lobo, Stryker Corporation - Chairman and CEO [25]

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Yes. And just accelerating some of our spending plans. So we obviously have a commitment to margin expansion, operating margin expansion for the full year. We're still committed to that. But we had the chance to accelerate some of that spending to really get behind the launch. And so far, we're extremely pleased with the way the launch is going.

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Glenn S. Boehnlein, Stryker Corporation - CFO and VP [26]

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Yes. And, Rick, keep in mind that as we described sort of our CTG plan, and we describe sort of our operating margin improvement targets, we said at the analyst meeting last year that it would be 30 to 50 basis points, but in the earlier year, it would be closer to 30 because of these types of investments that need to be made.

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Operator [27]

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And our next question comes from Matt Miksic from UBS.

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Matthew Stephan Miksic, UBS Investment Bank, Research Division - Executive Director and Senior Research Analyst [28]

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So I wanted to talk a little bit about Spine, maybe some of the efforts that you're putting in place there in terms of your product line, in terms of the sales force or just what has been effective that you've found in terms of improving the growth rate of that business? How sustainable is that? And then, I also, apologies, have to ask a question here about MAKO, but I'll start with Spine.

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Kevin A. Lobo, Stryker Corporation - Chairman and CEO [29]

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Okay. Sure. So really, the biggest part of our growth story in Spine has been our Tritanium, so our 3D-printed interbody device, which is really -- it was a limited launch last year, and that's really accelerating. So we're pleased with that. But we have a number of new products that are going to be 3D-printed that will be launched over the course of this year. We expect that to accelerate our growth. We also are bringing some couple of products back on the market that were off the market for the first -- almost the whole year last year. And so those are just starting to take hold. So we actually expect our Spine business to improve over the course of the year, this quarter being a little bit softer than what we will experience in the next few quarters.

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Matthew Stephan Miksic, UBS Investment Bank, Research Division - Executive Director and Senior Research Analyst [30]

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That's great. And then, on Spine -- I mean, on MAKO. So I guess, one of the things I'd love to understand, we all have heard your comment about back-end, back of the year kind of maybe visible share gains in knees in the U.S., driven by the launch. But can you talk a little bit about maybe some of the dynamics of share or performance of these accounts as you upgrade them versus as you, say, place a new system with the total knee in place? What are those accounts like? Maybe help us understand the dynamics of how those 2 develop as examples. That'd be very helpful.

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Kevin A. Lobo, Stryker Corporation - Chairman and CEO [31]

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Well, thanks. That's -- each account is its own story. It's kind of like the all politics are local discussion. So certain accounts, you'll have surgeons that will quickly adopt and convert most of their procedures to robotic and other surgeons that'll maybe be doing the robotic surgeries on a Friday, and if they're a high-volume surgeon, and maybe doing their other -- the normal procedures on their Monday and Wednesday. So it really varies greatly, and it's very early in the launch. So we're really not at a point yet where we could sort of characterize them for you to say, well a competitive robot takes x amount of time to get to max penetration. Those -- we're gathering all of that data, and in future quarters, we'd be able to characterize that more clearly. Today, it's really each account has its own story, in terms of how it's scaling, but what I can tell you is we're extremely pleased. Where we're placing robots, they're becoming productive, and we're obviously tracking all of those metrics. But it's a little early yet to give you more insight.

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Operator [32]

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Our next question comes from Matt Taylor from Barclays.

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Matthew Charles Taylor, Barclays PLC, Research Division - Director [33]

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So I have 2 questions, really. One, I just wanted to see if you could give any kind of color on why pricing was a little bit better this quarter. If you could give any color on the different segments or if you saw any meaningful change, we'd just love to hear about that.

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Glenn S. Boehnlein, Stryker Corporation - CFO and VP [34]

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Sure, Matt. Price for the quarter, I will say, was not as bad as we initially anticipated. But as we think about trends for the year, price is heavily impacted by mix and geography. And so just given that we only have this one quarter and that we did have a mix that was skewed a little more towards MedSurg, which provided some slight favorability, at this time, I'm not willing to declare that this is a trend for the whole year. And I think that's where -- so we won't revise our pricing guidance.

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Matthew Charles Taylor, Barclays PLC, Research Division - Director [35]

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Okay. And then, sort of underlying some of the issues that you called out with Physio and Sage, the MedSurg business had a pretty solid quarter. And you did call out in your comments, core growth in the beds and cots. I was just curious kind of what you're seeing in the capital environment as it relates to those lines and some of the other Instruments that you sell. It seems like things are pretty healthy. Is that a fair characterization?

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Katherine A. Owen, Stryker Corporation - VP of Strategy & IR [36]

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Yes. I think we viewed our capital business, and I would stress our capital business because we have a different mix than others, as remaining healthy. There's been no real change, but the environment has been healthy for some time. We're in a strong product cycle, as you see in Endo with the 1588 and now with the early launch of the System 8 within Instruments, and these are upgrade cycles. It's something our sales force knows really well how to do in that replacement cycle. So overall, we feel good about the capital environment. Haven't noticed any real changes in those trends versus prior quarters.

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Kevin A. Lobo, Stryker Corporation - Chairman and CEO [37]

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Yes, I'm really pleased with the Medical team. The core Medical business grew double-digit organically on a global basis. And I think Glenn gave you the U.S. business, but internationally grew extremely well as well. And they're doing this while integrating Sage and Physio and working through some challenges as we discussed in those businesses. So we're really delighted with the core performance in the first quarter.

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Operator [38]

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And our next question comes from Joanne Wuensch from BMO Capital Markets.

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Joanne Karen Wuensch, BMO Capital Markets Equity Research - MD and Research Analyst [39]

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Two questions. The first one has to do with emerging markets. Could you please give us an update on how you're doing in those areas? And then the second one, your Trauma and Extremity business had a wonderful quarter. Anything behind that, that you can share with us?

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Kevin A. Lobo, Stryker Corporation - Chairman and CEO [40]

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Sure, I'll start with emerging markets. Look, we're really pleased with the performance in India and Brazil. And our China business had good growth, which really benefited more from weaker comps in the prior quarter. But we still have more work to do there, including we're in the process of adding a new Chinese leader. And then, once we start to make some changes in China, we expect that China will be a bigger contributor to our growth. But overall, the emerging markets were no longer a headwind, but certainly, growing sort of roughly close to the overall average for the company in the first quarter. But very pleased with India, very pleased with Brazil. Some of those key markets are -- have been growing very well for us. And certainly, Brazil is a turnaround. India has been a great story for the past 4 years and now becoming a more meaningful business. So overall, good news. We still have a lot of work to do in China to get that business back to where it needs to be. And your second question was on Trauma. We really have terrific performance in our Foot & Ankle business, driving very high growth, very strong double-digit growth. And that was the biggest contributor. But overall, we had a very strong performance. And Trauma, as you know, has been a great business for us for the past 4 years and really pleased in the first quarter.

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Operator [41]

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Our next question comes from Josh Jennings from Cowen and Company.

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Joshua Thomas Jennings, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [42]

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First, I just wanted to ask on the comments you made, Kevin, about the international demand for MAKO. I don't know if you guys have disclosed this historically, but can you give us an idea about where you have approvals, and then, what the update is in terms of a total knee indication approval in different territories?

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Katherine A. Owen, Stryker Corporation - VP of Strategy & IR [43]

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So outside the U.S., and I would underscore the U.S. has been, obviously, the main market, Australia has been a very healthy market for robot placement, and they have the TKA approval. We have approval for that application in Europe, but it's still very early. So I wouldn't assume a big contribution there. I think you really should think about the U.S. and Australia driving most of the momentum as it relates to this year.

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Kevin A. Lobo, Stryker Corporation - Chairman and CEO [44]

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But we do have a smattering of MAKOs across Southeast Asia, across different European countries. They don't all yet have the TKA, and we're going to be very measured about the total knee launch. As we implement those, we're going to be as disciplined as we are here in the United States. But tremendous interest, and for us, it's just pacing, making sure we put them in the right sites with the right surgeon champions and go through our training.

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Joshua Thomas Jennings, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [45]

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Great. I just wanted to follow up another MAKO question. Not to put the cart before the horse, but when you talk about incremental MAKO investments, it just rang a bell that -- just in terms of curiosity about updates about potential future indications. And if you're not comfortable disclosing where MAKO could potentially go, any idea in terms of when you might give the investment community an update in terms of your path forward there and indications outside of uni, total knee and hip?

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Katherine A. Owen, Stryker Corporation - VP of Strategy & IR [46]

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Yes. I think just given the enormity of the total knee market application and the early stages of the launch, you should view our comments around accelerated some of the investment spending it's all focused around the total knee. That's where the organization has their efforts focused. Longer term, we'll see what happens, but right now, we really have everybody's energies focused around optimizing this launch, given the size of the market opportunity and our desire to do it right.

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Operator [47]

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Our next question comes from Matt Keeler from SunTrust.

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Matthew Jess Keeler, SunTrust Robinson Humphrey, Inc., Research Division - Associate [48]

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Just first one on MAKO. The other Ortho line was very strong, I guess, highlighting -- reflecting the robot placements. Was there anything in that line that was kind of onetime? Or maybe related to a bolus of trainings or something like that, that maybe makes this not sustainable? Or you think you can continue on -- at that level of growth?

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Katherine A. Owen, Stryker Corporation - VP of Strategy & IR [49]

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No. There wasn't anything onetime associated in that number. But keep in mind, it includes bone cement, it includes revenue associated with the robots installed and it includes revenue associated with the upgrades, and as well as some revenue associated with SPS. So there's a number of items in there. But there was nothing unusual other than the fact that we're installing more robots and doing upgrades.

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Matthew Jess Keeler, SunTrust Robinson Humphrey, Inc., Research Division - Associate [50]

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Got it. And just to drill down on an earlier question on MedSurg pricing, where that turned positive in the quarter. I mean, what, specifically, were some of the factors that drove that? And what gives you pause around whether or not that might be sustainable?

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Glenn S. Boehnlein, Stryker Corporation - CFO and VP [51]

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Yes. I think when you look at MedSurg, there's a lot of different capital products. They serve a wide customer base. And I would tell you that as you look at these deals, they're negotiated over long periods of time for larger capital. And so I can't say that any one thing pointed to an uptick in price, other than the combination of we felt some really good robustness at year-end, and that carried over into Q1. And I don't anticipate that we'll consistently be able to deliver a 1% price increase like we did in this quarter for MedSurg.

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Kevin A. Lobo, Stryker Corporation - Chairman and CEO [52]

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But it has been -- certainly, that's the one segment that is the least price-sensitive within our portfolio, and has been for some time. That MedSurg leadership team has really done a great job of focusing on price, even in terms of how the force is paid. They're paid more if the prices are higher for certain product categories. And so this -- it's not a new fact that MedSurg can drive price. It was a little bit more positive than we anticipated in the first quarter, but as the mix was very strong in that segment, and that's a segment that has been doing a very good job managing price over the past couple of years.

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Operator [53]

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Our next question comes from Matt O'Brien from Piper Jaffray.

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Jonathan Preston McKim, Piper Jaffray Companies, Research Division - Research Analyst [54]

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This is JP in for Matt. I wanted to ask about the System 8 launch. Just trying to figure out when that officially launched, and maybe some early feedback that you've seen there. And how we should think about how that can contribute to the rest of '17 and '18?

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Katherine A. Owen, Stryker Corporation - VP of Strategy & IR [55]

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So we just launched in the second quarter here. So that'll ramp up as we get into the second half of the year. And as you've seen before, when we launched whether it's a new power tool or new camera within Endo, it typically is a multiyear run as we upgrade and hospitals go through their process of upgrading their fleet. So feel really excited about this. This is right in the wheelhouse of what the instrument team does really well since power tools really drive that business.

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Kevin A. Lobo, Stryker Corporation - Chairman and CEO [56]

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Yes. What I'm really pleased about is as System 7 started to taper, we didn't really see the drop in growth as we have seen in the past. With previous launches, they were able to really make a nice transition from System 7 towards System 8. And I think part of that is the Neptune 3 launch has really helped on the waste management side to offset some of the slowdown, which naturally occurs when you're at the end of a product cycle. So the Instruments team's done a really nice job of holding it together as they prepared for System 8. And it's early days, yes. So far, the feedback's been very positive, but we'll hear a lot more about that in the next few quarters.

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Jonathan Preston McKim, Piper Jaffray Companies, Research Division - Research Analyst [57]

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Got it. And then, one more for me, kind of higher level. You guys have made some good investments in the 3D printing. There's a lot of buzz around 3D printing implants. It sounds like it's going pretty well in your Spine segment. Just wondering, strategically, where you think you can take this capability across your entire portfolio going forward.

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Kevin A. Lobo, Stryker Corporation - Chairman and CEO [58]

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Yes. Right now, we have -- we're in the process. We've built an entire building, and we're filling it with 3D printing machines, in Cork, Ireland. We have tremendous demand and interest from, basically, all of our implant businesses for 3D-printed products. And we're really focused on innovation. So at this point, all the products that we're launching are really adding innovation, either removing bone cement, creating new geometries that don't exist previously. So we have a pretty healthy pipeline of demands, and we're scaling it as fast as we possibly can to meet the demand. So I'm not going to get into specifics on which products, but we have a very healthy demand, and we're extremely -- we gained tremendous experience in 3D printing titanium. So it's really titanium is the key -- the metal that we're focused on, but tremendous interest for multiple divisions of Stryker.

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Operator [59]

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Our next question comes from Anthony Petrone from Jefferies.

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Anthony Charles Petrone, Jefferies LLC, Research Division - Equity Analyst [60]

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Maybe a question just on volumes and the state of the hospital market in the U.S., broadly. And so volumes look to pick up sequentially a bit across all of the divisions, but you had the extra selling day. And really, I guess the comments this quarter were mixed, mixed from HCA, better from Intuitive, better from J&J, mixed from some others. So maybe from where Stryker sits, what are your latest comments on volumes and hospital in general? And then, in MAKO, specifically, can you give us an idea of the foot traffic at the 40 training locations from physicians? And are you expecting a conversion rate of 1:1 from those physicians to full total knee implanters?

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Katherine A. Owen, Stryker Corporation - VP of Strategy & IR [61]

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So no real difference in our commentary as it relates to our mix of businesses in hospital volume. Everything feels and looks very stable, and you can see that with the organic number that we delivered, even adjusting for the extra selling day. Our capital businesses really don't have any impact, whether it's an extra selling day or 1 less selling day. It really doesn't impact those businesses. And then, in terms of the conversion, if I'm understanding the question correctly, as we -- do you mean in terms of if there's a robot out there, are they converting to TKA for an upgrade? The vast majority of the robots installed in the field, we believe, will be upgraded to a total knee.

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Kevin A. Lobo, Stryker Corporation - Chairman and CEO [62]

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I think -- but if your question was more related to people who are going to one of our training sites, if they have enough of an interest to go to a cadaver training or to go to our training site, we do believe it's going to be a very high hit rate, because to get to that point, they will already have a certain level of interest. And basically, what we should -- what we felt at the academy, once they started to understand what MAKO really gives them, we believe the conversion rate's going to be very high because a lot of people had a preconceived idea that they're really just getting some kind of automatic saw. And yes, the saw blade is one of the features of the robot, but it's clearly not the most impactful part of it. It's really about how you can balance the knee and make interoperative adjustments and be able to do recuts. And there's all these other features that surgeons really didn't understand. So even those that had been surveyed in the past were expressing their feedback based on some idea of what MAKO was. And what was great about the academy meeting was they were able to really understand the full value of what it delivers. So if that question around conversion rate, we do expect if they're going to go to one of these training sites for a visitation or go to a cadaver lab, we expect a very high conversion rate.

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Operator [63]

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Our next question comes from Richard Newitter from Leerink Partners.

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Richard Newitter, Leerink Partners LLC, Research Division - MD, Medical Supplies and Devices and Senior Analyst [64]

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I wanted to just first ask about MAKO. And at AAOS, we heard about some competitive offerings, Smith & Nephew launched their total knee. You had Zimmer, who announced ambitions to get into robotics. I'm just wondering if -- since AAOS, if you could characterize any of it. How the conversations have changed with any prospective customers or anyone that's considering a robot in light of some of these other solutions? And if you could comment at all on the competitive landscape in total joint robotics.

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Katherine A. Owen, Stryker Corporation - VP of Strategy & IR [65]

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Yes. Thanks, Rich. I appreciate the question. I would say the conversation hasn't changed at all. We remain focused on launching our total knee. We believe the features and benefits of our robot and where we are in both the installed base and the field and actively doing upgrades for an existing application where we've been able to demonstrate the benefits and features of it is a pretty powerful conversation. We've talked about over 40% of the robots installed going to competitive accounts, and that continues to be the trend. So there's been no change in the conversation. Really, it's focused around what MAKO can do as opposed to background noise about competitive offerings that may or may not come to market.

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Richard Newitter, Leerink Partners LLC, Research Division - MD, Medical Supplies and Devices and Senior Analyst [66]

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Okay. Great. And then, just a follow-up here on Trauma. Some of the smaller spine competitors are starting to get into or have ambitions to get into trauma. I was just wondering, what can you comment on within that industry? Your growth has been holding pretty steady. It feels like it's a pretty attractive overall market. But are there any trends there that you think could lead to increased competition? And if you were to see more players coming in, why or how is Stryker potentially positioned to fend that off?

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Kevin A. Lobo, Stryker Corporation - Chairman and CEO [67]

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Yes. I think, Trauma is a little bit different than if you look at, say, Spine. And the reason I think it's different is you really need to have a full offering. You need to have a full offering of plates. You need to have a full offering of nails. You need to have a -- sort of a complete offering if you want to take over an entire account or even to really thrive in a Level 1 Trauma center. That was our learning. If you remember, for a long time, Synthes was the dominant player in trauma. Everybody else was a distant second. And until we rounded out our full portfolio, that's really -- once we finished rounding out the portfolio, that's when we really started to take off in our growth about 4 years ago. So will some competitors be able to nibble around a little bit here and there with some business? Sure. But to be a real meaningful player, having that full portfolio is extremely important. I think that makes Trauma a little bit different than some of the other specialties.

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Operator [68]

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Our next question comes from Larry Biegelsen from Wells Fargo.

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Craig William Bijou, Wells Fargo Securities, LLC, Research Division - Senior Analyst [69]

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It's actually Craig on for Larry. Kevin, I wanted to start with you. And we've seen a number of large deals in med tech over the last couple of years. So just wanted to get your thoughts on potential consolidation within the space and if there's any competitive dynamics or the environment that may be driving more of a consolidation of some of the subsectors under a bigger company.

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Kevin A. Lobo, Stryker Corporation - Chairman and CEO [70]

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So what I'd say is that we remain committed to our current strategy, which is to drive category leadership in the segments that we are currently playing in. And we're going to continue to do this through a combination of internal innovation as well as acquisitions. As you've seen, this strategy is serving us really well, and we expect it will continue to serve us well going into the future.

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Craig William Bijou, Wells Fargo Securities, LLC, Research Division - Senior Analyst [71]

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Okay. And just as a follow-up. I wanted to ask about when will the results of the DAWN clinical trial be presented? Will it be at the European Stroke Meeting in May, which I think is the next big meeting? And what impact do you think the results could have on growth of the ischemic market?

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Katherine A. Owen, Stryker Corporation - VP of Strategy & IR [72]

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Yes, it will be at the May meeting in Europe, we will see -- the results will be presented. I think it certainly affirms the opportunity here by widening the treatment window, which is obviously one of the challenges with this ischemic patient population. But there's still work to be done in terms of building the market awareness, the referral channel, all the points along the treatment paradigm that will take a number of years to really fully realize. So it's a great -- when we've got the clinical data to support it, but there's a lot of market development work. That's not new. We've talked about this before, but obviously, this type of clinical data helps to drive that process.

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Operator [73]

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Our next question comes from Kaila Krum from William Blair.

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Kaila Paige Krum, William Blair & Company L.L.C., Research Division - Research Analyst [74]

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So when I think about kind of the spinal implant market, and you're obviously focusing on Tritanium and 3D printing there. But can you talk a little bit more about what inning we are in with those technologies? And what's next as far as your R&D pipeline in Spine? I guess, I mean, specifically, do you see more value in investing in robotics technologies in spine? Or are you drawn more towards innovating the implant, either through development or acquisition of a motion preservation disk or expanding the Tritanium platform? Just trying to understand the long-term vision there.

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Kevin A. Lobo, Stryker Corporation - Chairman and CEO [75]

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Sure. So for Stryker, I would tell you that we're in the early stages with Tritanium, very early stages. And we believe that it's going to have broader application. We've had terrific success. We have a claim that it promotes bone in-growth, which is a really powerful claim with Tritanium. So I would say it's early innings. And certainly, we only had one product that did very, very well last year. We're launching more products this year. So I think we're in the early innings on Tritanium. With respect to the rest of our portfolio, I'm not going to get into, specifically, which products that we have in development. We do have an active R&D pipeline. And clearly, the areas of less-invasive surgery, Biologics, those are the areas that clearly have the most potential. But I'm not going to get into specifics about which specific areas we're going to focus on, at least not at this point.

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Kaila Paige Krum, William Blair & Company L.L.C., Research Division - Research Analyst [76]

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Okay. That's fair. And then I guess just a follow-up. Some of your Spine competitors have commented that volumes were a bit slower in Spine in January and February this year. And then, they saw a pickup in March. It doesn't sound like that's something that you're seeing broadly in your business, but is that something that you've seen in the Spine segment specifically?

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Katherine A. Owen, Stryker Corporation - VP of Strategy & IR [77]

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Yes. We really have stayed away from commenting on month-to-month trends. We haven't found it to be, really, a good barometer of how a quarter or quarters play out. So we're probably not going to get to that level of detail.

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Operator [78]

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And our next question comes from Brent Williams from D.A. Davidson.

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Brent Peter Williams, D.A. Davidson & Co., Research Division - Research Analyst [79]

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Just had a question on the CapEx spend through the year. I see little bit of a pickup this year versus Q1 last year. I believe it was in the guidance that 2017 is going to be up $450 million. Is that still kind of what you guys are looking at for this year?

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Glenn S. Boehnlein, Stryker Corporation - CFO and VP [80]

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Yes, Brent. We're still targeting that number. CapEx includes spending related to ERP and other systems as well as facilities. And as Kevin mentioned, we are spending a fair amount on new 3D printing equipment. So those are kind of the broad categories in there, but we're still targeting the number that we guided to.

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Operator [81]

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And there are no further questions at this time. I will now turn the conference over to Mr. Kevin Lobo for any closing remarks.

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Kevin A. Lobo, Stryker Corporation - Chairman and CEO [82]

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Thank you all for joining our call. Our conference call for the second quarter 2017 results will be held on July 27. Thank you.

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Operator [83]

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Thank you, ladies and gentlemen. This concludes today's conference. Thank you for your participating. You may now disconnect.