Stryker (SYK) Q1 2019 Earnings Call Transcript

Stryker (SYK -0.46%)
Q1 2019 Earnings Call
April 23, 2019 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to the first-quarter 2019 Stryker earnings call. My name is Jesse and I'll be your operator for today's call. [Operator instructions] This conference call is being recorded for replay purposes. Before you begin, I would like to remind you that the discussions during the conference call today 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 is an exhibit to Stryker's current report on Form 8-K filed today with SEC. I will now turn the call over to Mr.

Kevin Lobo, chairman and chief executive officer. You may proceed, sir.

Kevin Lobo -- Chairman and Chief Executive Officer

Welcome to Stryker's first-quarter earnings call. Joining me today are Glenn Boehnlein, Stryker CFO; and Katherine Owen, vice president of strategy and investor relations. For today's call, I'll provide opening comments followed by Katherine with updates on Mako and K2M. Glenn, will then provide additional details regarding our quarterly results before we open the call to Q&A. Following an excellent 2018, our Q1 results reflect continued momentum across our three segments, with over 7% organic sales growth.

This growth was balanced between U.S. and international at roughly 7% each, with a particularly robust gains in emerging markets and Europe. By segment, MedSurg led the way with 9% worldwide organic growth, driven by impressive mid-teens organic growth at instruments. Orthopedics grew 5% globally, with knees growing 7% behind Mako, and hips gaining 4%, benefiting from the recent 3D printed Acetabular cup launch. Neurotic and Spine had worldwide organic growth of 8% as Neurotics double digit growth powered by Neurovascular was offset by low-single digit spine growth. Turning to the P&L.

Adjusted operating margin improved by 0.10% basis points, despite absorbing significant deal related dilution. with the strong top line and continued progress with our Cost transformation for growth (CTG) initiatives, we remain on track to achieve our full-year target of 0.30% to 0.50% basis points of operating margin expansion. We continued to effectively integrate acquisitions and also, make meaningful investments in R&D which ensures a steady cadence of new product introductions, such as endoscopy's recently launched 1688 camera.

Overall, driven by the sales growth at the high end of med tech,  we had achieve adjusted per share earnings of a $1.88 up to 12%. Looking ahead to the full year, we are confident in sustaining this momentum, and in our ability to deliver on our commitments to our customers, employees and shareholders. This is reflected in our adjusted guidance which raises the bottom end of both our full-year organic sales growth, and adjusted EPS ranges.

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

Katherine Owen -- Vice President of Strategy and Investor Relations

Thanks, Kevin. Starting with Mako, we installed a total of 35 robots globally in the quarter, with 27 in the United States. By comparison in the comparable quarter a year ago, we installed a total of 28 robots of which 24 were in the United States. Globally, our installed base of robots is approaching 700, with over 550 in the United States. 

Looking at U.S. procedures in Q1, Mako total Knee procedures exceeded 15,000, increasing over 80% from the prior-year quarter, while total Mako procedures approximated 24,000. These results indicate we are continuing to build on the momentum we saw in 2018, where total Mako Knee procedures for the year topped 45,000.

With the continued healthy order book, we anticipate strong robot sales in 2019, as hospital insurgent interest in robotic programs for orthopedics continued to increase. We also expect to continue to build on the clinical data that demonstrates the unique benefits of the Mako Technology. Turning to K2M, we are pleased with the continued progress on the integration front.

With the organizational structure in place, we are building inventory to help support cross training for our combined selling organization. On a combined constant currency basis, our sales grew 2% in the quarter, and we anticipate a continued sequential ramp in sales for the full year, and we are on track to achieve a combined fine sales growth in the mid-single digits for 2019. With that, I'll now turn the call over to Glenn.

Glenn Boehnlein -- Chief Financial Officer

Thanks, Katherine. Today, I will focus my comments on our first-quarter financial results and the related drivers. Our detailed financial results had been provided in today's press release. Our organic sales growth was 7.3% in the quarter.

As a reminder, this quarter included the same number of selling days as Q1, 2018. Pricing in the quarter was unfavorable 1.4% from the prior quarter, while foreign currency had an unfavorable 2.1% impact on sales. For the quarter, U.S. sales continue to demonstrate strong momentum with organic growth of 7.4%, reflecting solid performances across our portfolio. International sales grew 6.9% organically, which was balanced across the regions. Our adjusted quarterly EPS of $1.88, increased 11.9% from the prior year, reflecting strong drop through on sales growth.

Combined with good operating expense control and some favorability on our quarterly effective tax rate. Our first-quarter EPS included an approximate $0.05 negative impact from exchange rates, including translational and transactional. This is versus a $0.02 to $0.04 that we had anticipated at the start of the quarter. Now I will provide some highlights around our segment performance.

Orthopedics delivered constant currency growth of 5.1%, and organic growth of 5%. U.S. organic growth of 4.4% is highlighted by knees which grew 6.6%, in mid-teen growth of orthopedic capital. This was offset by anticipated decline in bone cement related to the continued growth in cementless, and the timing of bulk orders.

Within the knee segment, we continue to see strong demand for our Mako, Total knee arthroplasty (TKA) platform, our cementless knee and other 3D printed products. U.S. trauma grew 3% against tough comparisons and was impacted by a delay in the full commercial launch of T2 Alpha, which has been pushed back to mid-year.

Internationally, orthopedics delivered organic growth of 6.4%, which reflects solid performances in Europe, Australia, and emerging markets with particularly strong growth in China. MedSurg continue to have strong growth across all businesses in the quarter. The constant currency growth of 10% and organic gains of 8.9%, which included a 10.6% increase in the United States. Instruments had U.S. organic growth of 17.5% led by impressive gains across its power tool and waste management products.

Endoscopy delivered U.S. organic growth of 7.5%. Endoscopy had strong performances across its Novedex XT, sports medicine, communications, and procare businesses. Late in the quarter, endoscopy launched its new 1688 video platform and began to shift initial units.

The Medical Division had U.S. organic growth of 9.2% reflecting solid performance in its bed, stretcher, and sage businesses. Internationally, MedSurg had organic growth of 2.7% with strong performance in China and other emerging markets, partially offset by softer performance in Japan and Australia. Neurotechnology and Spine had constant currency growth of 23.2%, driven by our K2M acquisition and organic growth of 7.8%.

This growth reflects good performance within our Neurotech product lines including, high-teen growth performance of our Neurovascular business. Our U.S. Neurotech business had organic growth of 8.3% for the quarter, highlighted by strong double digit growth of our Neurovascular business offset by expected softness in neuro powered instruments ahead of the planned Sonopet iQ launch. Underlying the overall growth there, we continue to see strong demand for our hemorrhagic ischemic stroke and CMF products. 

We made significant progress in our integration of K2M especially on the execution of our plan cost synergies. Our sales integration is ongoing and we continue to manage through the anticipated Sales force disruption, which primarily impacted our U.S. growth. Internationally, Neurotechnology and Spine had organic growth of 14.3%, this performance was driven by continued strong demand in Europe, China and other emerging markets. 

Now, I will focus on operating highlights in the first quarter. Our adjusted gross margin of 65.8% was unfavorable 0.50% basis points from the prior-year quarter. Compared to the prior-year quarter, gross margin expansion was favorably impacted by acquisitions, but offset by price and business mix. R&D spending with 6.2% of sales. Our adjusted SG&A was 34.5% of sales which was favorable to the prior-year quarter by 0.50% basis points.

This reflects the continued focus on operating expense improvements through our Cost transformation for growth (CTG) program, including key projects focused on indirect purchasing and shared services. This is offset by negative impact of acquisitions and continued planned investments in other Cost transformation for growth (CTG) program, like our ERP project which has been expanded in scope given our acquisition activity.

In summary for the quarter, our adjusted operating margin was 25.1% of sales which was approximately 0.10% basis points favorable to the prior year quarter. Our operating margin primarily reflects good leverage and continued operational savings, offset by investments and acquisitions. The latter of which had an approximately 0.50% basis points negative impact on the quarter. Next, I will provide some highlights and other income and expense.

Other expenses decreased from prior quarter primarily due to favorable interest rates and other income. Our first-quarter adjusted effective tax rate was 14.4%, which primarily reflects the benefit related to stock compensation expenses. As a reminder, we are still forecasting a full-year effective tax rate between 16% and 17%. Focusing on the balance sheet.

We continue to maintain a strong position with $1.8 billion of cash and marketable securities, of which 45% was held outside the United States. Total debt on the balance sheet was $8.5 billion. Turning to cash flow. Our year-to-date cash from operations was approximately $313 million; this reflects the net impact from increased adjusted earnings, certain acquisition and integration charges related to K2M, and the receipt of a legal settlement payment. In January 2019, we repurchased approximately 1.9% million shares for $307 million.  And now, I will discuss our second-quarter guidance.

As a reminder, Q2 and Q4 have the same number of selling days as 2018, while Q3 has one more selling day. Even our first-quarter performance and continued momentum, we now expect organic sales growth to be in the range of 6.8% to 7.5% for 2019. A foreign currency exchange rates hold near current levels, we expect net sales in the second quarter will be negatively impacted by approximately 1.5%, and the full year will be negatively impacted by approximately 1%.

Net earnings per diluted share will be negatively impacted by $0.01 to $0.03 in the second quarter, and negatively impacted by $0.05 to $0.10 in the full year. We also now believe our adjusted net earnings per diluted share will be in the range of 8.05% to 8.20% for the full year.

For the second quarter, we anticipated adjusted net earnings per diluted share to be in the range $1.90 to $1.95. This guidance full year and second quarter include anticipated impacts from acquisition dilution, and the net foreign currency exchange, including both translational and transactional impacts. And now I will open up the call for Q&A. 

Questions and Answers:

Operator

Thank you. We will now begin the question and answer session. [Operator instructions]. Your first question comes from the line of Bob Hopkins with Bank of America.

You may proceed.

Bob Hopkins -- Bank of America Merrill Lynch -- Analyst

Thank you very much for taking the questions. I guess to start out --congrats on a really strong quarter. Two things stuck out to me. One, I wanted to get a little better sense for your commentary on Europe and in emerging markets that strong striker performance, is that a strong market or is that kind of both.

Thank you for the first question.

Kevin Lobo -- Chairman and Chief Executive Officer

I would say Bob that it's really our efforts. As you know, we are under penetrated in these markets versus the competition, and we've been upgrading our talents and changed our commercial offense in Europe. And I think it's primarily our efforts on market conditions. In Europe continued to be pretty challenged, but we had a particularly strong quarter. We did benefit from that comparison in the prior year.

If you remember, the UK had debt blockages, so we didn't have that comparison this year. And in emerging markets,  it's really -- we've been getting our offense rolling. Last year, we had double-digit growth, and we had strong double-digit growth this year in emerging markets. I'd say, it's more of a Stryker story, but that's really due to our relative position versus others.

Bob Hopkins -- Bank of America Merrill Lynch -- Analyst

And then for the follow up, I just wondered if you could talk about a little bit about the growth drivers over the course of the rest of this year. It sounds like the camera obviously, was a little early for that to have any impact. But I know I had a good growth rate anyway. And now the camera should kick-in for the rest of the year.

But what are the things that we should be thinking about as we consider the rest of the year in terms of growth drivers. Obviously, from my vantage point there's one big obvious incremental positive, but what are the other things that we should be thinking about.

Katherine Owen -- Vice President of Strategy and Investor Relations

Bob, as you mentioned 1688, we did just start the commercial launch at the end of the quarter. And similar to prior camera launches, as you know, it's usually a couple of quarters before they really hit their stride. So I would think about that having a more meaningful contribution to end though in the second half of the year. We also feel really good about the Mako order book.

So we expect continued strong demand for the robot and continued strong utilization there, so there will be a driver. If you look across the portfolio, as you know we're a lot of singles and doubles. I think we've got some product launches coming, like our next generation Sonopet, which will have an impact, and as you get of around mid-year. And then trauma was impacted by some delays tied to the full commercial release of T2.

So that's probably going to be in a full commercial release mode around mid-year. That will have more of an impact on trauma in the second half of the year. So that's just a few of the ones I would highlight.

Bob Hopkins -- Bank of America Merrill Lynch -- Analyst

Great, Thank you.

Operator

Your next call comes from the line of David Lewis with Morgan Stanley. Your line is open.

David Lewis -- Morgan Stanley -- Analyst

Good afternoon. A couple of questions from me, I thought Kevin, if we could start on a post AOS on the broader ortho market. I think everyone talked about ortho growth in 2018, and maybe the fourth quarter was not as strong as some had hoped. Your numbers in the first quarter seemed pretty in line to make a number was strong.

I noticed, the Mako procedure number was more flattish sequentially. I want to you to talk about your thoughts on Mako procedures sequentially. The orthopedic market volume for the first quarter versus expectations, and your outlook for these businesses in post AOS.

Katherine Owen -- Vice President of Strategy and Investor Relations

I'll take that Mako part. First, I think you got to keep in mind the cadence of procedure volumes when you go from Q4, which is always the strongest quarterly number for week on into Q1. So we always have fewer volume of procedures in the first quarter, and also the Mako placement which was very robust in the fourth quarter, don't factor in until we have them out for a full quarter. So it's just the normal cadence.

We had roughly 30% year- over-year growth in the utilization rates. For the robot, we had healthy procedure growth of around 80% year-over-year. So I'd focus less on sequential, and more year-over-year unless you're going to adjust for the variance in sequential patterns. We feel great about what we're seeing with Mako, the order book, the demand for new robots. So nothing I'd read into beyond, just normal quarterly variance.

Kevin Lobo -- Chairman and Chief Executive Officer

On your second question about the orthopedic market.  last year was a slow market in general, and we had indicated that we thought this year would be slightly better. And I would say at this stage of the year, we do believe that the market will be slightly better in 2019 than it was in 2018.

David Lewis -- Morgan Stanley -- Analyst

Very helpful. And Kevin, you're focusing on the key upside driver in the quarter, obviously it was MedSurg. Bob, talked about the camera which will start contributing into the back half of the year. But obviously, in recent weeks has been a lot of concern about Medicare for all. The impact it would have on capital health providers.

Can you spend a moment on two things, how this business has transitioned in the last four to five years maturity ability perspective. And as you think about the balance of the year and the ability to deliver strong MedSurg numbers in the order book,how are you feeling about the balance of the year. Thanks so much.

Kevin Lobo -- Chairman and Chief Executive Officer

David, I would say there is really no change. If you go back to our analyst meeting that we had back in November,  I said "I expected 2019 to be every bit as good as 2018 or a very similar year. And at this stage for 2019 that holds. And that's really across our businesses". As you've seen since the beginning at 2018, we have a very good balance both across our businesses and across our geographies which is different than the story we had four or five years ago, so I feel like all our businesses are in healthy position.

We have a number of new products at a timing of which vary from business to business. But I feel very good about the durability of our sales performance.

Operator

Your next call comes from the line of Vijay Kumar with Evercore ISI. You may proceed.

Vijay Kumar -- Evercore ISI -- Analyst

Thanks for taking my questiion. I'll start with Mako. Kevin, there were some concern on a comparative entry, it looks like numbers are really strong. I'm just curious on how you see the market evolving with the new player.

Is this a case where the market is accelerating in both players benefit or in any talks and the competitive landscape. That would be a helpful starting point.

Katherine Owen -- Vice President of Strategy and Investor Relations

Thanks for the question. I think first of all, keep in mind that penetration rates in our own business are still very low. So there's a lot of opportunity here for growth in robotics. So we believe the competition is going to do what it typically does in most markets it's going to raise awareness and interest and help to grow the overall space.

Now, clearly we are the leader here, we've got robots features including haptics and the ability to do multiple joint procedures, so we expect our momentum to continue. We're seeing a ramp up in our customers hospitals with multiple makers, as well as new installs into hospitals. So given more penetration rates are, and given the unique features and benefits, and mounting clinical data in support of our robot, we feel really bullish about the outlook.

Kevin Lobo -- Chairman and Chief Executive Officer

And as Katherine said in our opening comments,  the order book continues to be strong. So we expect another strong year for Mako in 2019.

Vijay Kumar -- Evercore ISI -- Analyst

That's helpful. And a quick one for Glenn on the guidance comments here. It looks like FX worsen for you guys, but yet you raised a lower low end of the guidance. It looks like the underlying operating margin execution is coming in really well despite the increase of investments that you spoke about.

Maybe just comment on margins and what gives you the confidence. You're given the amount of deals you guys have done. Thank you.

Glenn Boehnlein -- Chief Financial Officer

First off, I would say on the FX issue, you're right it came in a little bit less favorably than we thought for first quarter. But looking at what happened to rates last year and where we think you know rates strengthen in the second half of last year, I think that will still stay within our 0%  to 10% range for the full year impact. The impact will be more pronounced early on in the year and less so in the latter half of the year.

In terms of margin -- a couple of things, Katherine just highlighted, first of all a lot of robust new product launches that will have, that mix will come into play later on in the year. I think in Q2 you're still going to feel the impact from K2M as we're still working through sales integration in the second quarter, so we still have a little bit of heavy dilution coming in from K2M for Q2. 

And then I think what you'll see beyond that is we'll start to see sales expansion on the new products. We'll also see continued improvement in our shared service efforts,  continued ramping of our indirect spend efforts. And that will start to offset some of these other things. I still remain very confident in our ability to hit 0.30% or 0.50% basis points expansion.

Operator

Your next call comes from the line of Richard Newitter with SVB Leerink. You may proceed.

Richard Newitter -- SVB Leerink -- Analyst

Hi, thanks for taking the questions. I want to start, I'm sorry if I missed it in the opening comments. Can you characterize just how the K2M integration efforts are going relative to your initial expectations and when do you think we will see some of the two synergies kind of playing out from that deal.

Katherine Owen -- Vice President of Strategy and Investor Relations

Yes,  I would say it's very much tracking as we anticipated, we closed late in the quarter. And as I mentioned on the on the call we feel really good with the progress, the organizational structures in place, we are building inventory to help support cross training for the combined selling organization. There's no change to our target of mid-single digit combined growth for the full year, so everything is going as expected. We expected sales synergies and higher dilution in the early part as you would assume.

And then we expect to see a continued sequential ramp in revenue as the year unfolds. Really nothing progressed so to add.

Richard Newitter -- SVB Leerink -- Analyst

Yes Kevin. Just going back to David's question on the underlying photo and new market growth rates, you know it's encouraging to hear that you feel confident compared to last year, a slight step up in market rates. But I guess my question is I want to appreciate the seasonality volumes are a little bit later, but they're in a season stronger for Q2. But you need growth rates.

Do you know kind of flattish even on a comp adjusted basis. I mean what more can you give that you're seeing in the marketplace that continues to give you confidence that there's that step up and growth for the year. Thanks.

Kevin Lobo -- Chairman and Chief Executive Officer

Yes.  I just think that last year was a bit of an anomaly. It was the lowest growth in a market that we've seen since 2011. And we don't see anything underlying in terms of demand and the hospital dynamics that would cause that to be a situation that would continue. So just think you get one of those kind of years every two to eight years. It is unlikely that that would continue. So I just think the underlying conditions in the market are good.

We can see with Mako that there's huge interest in continuing to advance the robotic offerings in knees in particular. So it's just one feeling right. I don't have a crystal ball, but it's just based on what we're seeing and what we're hearing in the marketplace. I think that right now our intent at the beginning of year, we said we believe it'll be a better year. There's nothing I've seen that that leads me to believe it won't be.

But I'm not expecting it's not going to double or triple. It'll be a modest improvement in 2019.

Operator

Your next call comes from the line of Kristen Stewart with Barclays. You may proceed.

Kristen Stewart -- Barclays -- Analyst

I was just wondering in terms of the gross margin if you can maybe help us purse out. How much of it was just kind of a mix of that versus anything else.

Kevin Lobo -- Chairman and Chief Executive Officer

Yes. Kristen, I can give you a sort of directionally what we felt. We really -- we've gotten away from guiding on gross margin and really focus on our margin. But for the quarter, we definitely first of all, had some some positive effect coming from adding in K2M because K2M has a very strong margins.

But really offsetting that were some of the big negatives especially price brought that down. And then secondly,  just mix you know, if you look at sort of the growth rates of orthopedics versus the growth rates of MedSurg you really are going to have skewing to lower gross margins because that's the way the capital businesses perform.

Kristen Stewart -- Barclays -- Analyst

That's helpful. And then just in terms of the tax guidance I think you said you've reiterated the 16% to 17%. Do you feel like the lower end might be a little bit more likely just given the performance in one cube.

Kevin Lobo -- Chairman and Chief Executive Officer

Ys. Keep in mind usually the cadence of how the effective tax rate plays out as it's usually lower in the first quarter. We have a lot of stock comp that flows through the first quarter and the other thing that hit us in this quarter was maybe a higher expected stock price than we had planned on initially. But you know based on our forecasting.

I'm still angling to the midpoint between 16% and 17% for the full year.

Operator

Your next call comes from Robert Marcus with JP Morgan. You may proceed.

Robert Marcus -- J.P. Morgan -- Analyst

All right. Thanks for taking the question and congrats on a good quarter. Can you give us sort of your latest thoughts here on capital allocation. You know maybe first, how free cash flow is trending and how we should think about that this year. And then maybe as we sit here you know a good chunk of the way into the integrations of your acquisitions how you're thinking about further M&A, and how you see the universe out there right now.

Kevin Lobo -- Chairman and Chief Executive Officer

I think, first of all as we reiterated several times, we really have not changed our capital allocation strategy. The bulk of our cash will go toward M&A, and then we'll have cash that we'll use for dividend expansion. And then lastly, for share repurchases. This year, we've completed our share repurchases and really just purchased enough to offset dilution. I think moving over to cash flow, keep in mind that first quarter is always seasonally sort of the lowest relative to our cash flow performance.

If you look at this year versus 2018, we had a lot more integration spending than we normally have because of the timing of K2M. I think offsetting that, we did get a legal settlement that came in. And then beyond that, I think if you just look at working capital performance, as Katherine had mentioned with K2M,  but also with other acquisitions we'll continue to expand inventory as we ramp up those acquired businesses. 

And so working capital will perform a little more negative early on in the year. Im terms of guidance, we are not backing away from our free cash flow performance in the range of 70% to 80% of adjusted net earnings, that's what we're targeting, and the whole business is lined up behind that.

Robert Marcus -- J.P. Morgan -- Analyst

Great. And maybe just one quick follow up on the Neurovascular business, another nice quarter there, double digit growth. Can you just give us the latest status of your product launches. I know you have a number of them coming over the course of this year.

Just give us the latest on where you stand and when we should start to see that throughout 2019. Thanks.

Katherine Owen -- Vice President of Strategy and Investor Relations

Yes. We're continued to be pleased with the performance on both the hemorrhagic and ischemic side and particularly with the ischemic market expansion likely to continue based on just the compelling clinical data. For our flow diverting,  stance surpassed, we're excited about that. But as we've said it before for both that and our aspiration those are going to be slow launches and really ramp up into the year. It's an exciting opportunity but you've also got established competitors there.

So I think it'll be a bigger driver of growth for that as we head into 2020.

Operator

Your next call comes from the line of Larry Biegelsen with Wells Fargo. You may proceed.

Lawrence Biegelsen -- Wells Fargo -- Analyst

This is the chagrin in for Larry. Thank you for taking the question. So Stryker recently acquired OrthoSpace and OUS clinical study is under way. According to clinicaltrials.gov, the study completion date is April, 2019, I was just wondering if you've seen the pivotal data yet.

What are your latest thoughts on the opportunity. And is the OUS launch likely in 2020, and then I have a follow up.

Kevin Lobo -- Chairman and Chief Executive Officer

Yes. We have not seen the pivotal data yet. I'm not sure about the April, 2019 date, we'll have to get back to on that. We don't have plans to launch OrthoSpace this year.

I can't really comment on when that'll be, we'll probably do that on the next earnings call. But we are very pleased with the data OUS is really compelling. Surgeon feedback is outstanding, it solves a huge unmet need of a large rotator cuff repairs which today are not treatable. So we're really excited about the future prospects. But in terms of timing for OUS launch I that's something we'll get back to on on the next quarter's call.

Lawrence Biegelsen -- Wells Fargo -- Analyst

Got it. And then just as a follow up, Kevin I was hoping to get your comments here. Some companies have indicated that the FDA is becoming more conservative with respect to product approvals, product classifications and as well as post market surveillance. As the CEO of Stryker and the new head of Advanced Medical Technology Association (AdvaMed) what are you seeing on your end and what is your sense of FDA direction going forward. Thank you.

Kevin Lobo -- Chairman and Chief Executive Officer

Yes, i know. For the Stryker portfolio products we're not really seeing much of a change. I think we have seen a couple of decisions recently whether it's related to [Inaudible] or more recently related to the slings, the vaginal mesh products. We've seen some decisions that the FDA has made which might be deemed a little bit abrupt, but overall our relationship industry with FDA has been very good and frankly has improved pretty measurably from five years ago.

I think our user fee agreements that we've had with the FDA have been terrific. And frankly most of the companies we talked to have more issues with CNF than they do with FDA. So I don't think there's a big change going on in FDA. There's been a couple of recent decisions that we're maybe a little bit more abrupt than what we are used to. But overall I would say, I would characterize the relationship between Stryker, and the FDA, and the AdvaMed more broadly and the FDA has a very healthy relationship. Keep in mind that Jeffrey Shuren  who is the head of Center for Devices and Radiological Health (CDRH) is still in his role, and we're very pleased with the progress he's made with the device group and have a good relationship with him.

So in spite of the change of the commissioner,  there hasn't been a change in terms of the CDRH branch. So I would say things are very good still with the FDA.

Operator

Your next call comes from the line of Chris Pasquale with Guggenheim. Please proceed.

Chris Pasquale -- Guggenheim Securities -- Analyst

Instruments was strong again this quarter, can you just talk a bit about what you're seeing in that business. The comps get a lot tougher starting in 2Q,  so how do you think about the growth potential of that segment going forward.

Katherine Owen -- Vice President of Strategy and Investor Relations

Thanks, Chris. Now you're correct, it was a really strong quarter. Candidly it came in better than we expected. We did split the sales force at the start of the year and that really helped bolster the revenue.

You often see that and when you split the sales force in the initial months. I do think you need to be cognizant of comparisons and the fact that I wouldn't necessarily extrapolate just how strong the first quarter results were, as you do your modeling for the remainder of the year. Though they'll have very healthy growth but this was a particularly robust quarter.

Chris Pasquale -- Guggenheim Securities -- Analyst

And then on the Trauma business, you mentioned the T2 Alpha launch had been delayed, what happened there and absent the impact of that. What are you seeing in those end markets and Trauma and Extremities.

Katherine Owen -- Vice President of Strategy and Investor Relations

That was really the biggest factor for us. Look we target a launch timing and sometimes it comes in earlier than expected as the case was with our 1688 camera and sometimes they get pushed out a few months or a couple of quarters. You're trying to thread the needle pretty tightly here so just working through some final issues as we get ready to launch it and we do expect a pretty big impact. But it's probably -- it's in limited release, we're probably looking at full commercial release more like mid-year. That was the biggest factor in the quarter.

Operator

Your next call comes from the line of Pito Checkering with Deutsche Bank. You may proceed.

Pito Checkering -- Deutsche Bank -- Analyst

Hi, guys. Thanks for taking my questions. Two questions for you on Mako. I do understand that the order book remains robust at this point, but has Mako sales cycle lengthened since the launch of the Rosa.

And the second one, you'd probably disclose there's 40% to 50% in Mako robot sales or competitive counts. Has that changed at all again since the launch of the Rosa.

Katherine Owen -- Vice President of Strategy and Investor Relations

So we haven't seen any difference or any change in terms of the order cycle for Mako, and we are continuing to see significant placement. It was about 55% in the quarter went into competitive accounts were there have no market share or very little market share. I will note though that going forward, we will no longer be providing that level of detail. We'll continue to give you robust sales both U.S.

and globally. We'll continue to give you Mako procedures so you can track the growth there, and we'll continue to give you a clean knee number that allows you to accurately track knee implant growth and market share gains. But beyond that, the detail we gave previously was really intended in the early days of the initial launch to validate the acquisition and the strength of the technology.

We're coming up on three years from the limited launch. So, we think we've established the success of Mako with 700 robots out there. So we think limiting it for really for competitive reasons to total robot sales procedures, and new revenue is what we're gonna be doing going forward. But for the quarter, yes we continue to see strong placements and competitive accounts at north of 50%.

Kevin Lobo -- Chairman and Chief Executive Officer

And no slower rate [Inaudible]

Pito Checkering -- Deutsche Bank -- Analyst

Perfect. One question on guidance. How much of the 0.30%, 0.50% basis points of operating margin improvement you got to in 2018 comes in the product mix.

Kevin Lobo -- Chairman and Chief Executive Officer

You know we're not we're not going to guide that specifically. I mean, I will say, when we looked at gross margin performance because MedSurg and Neurotechnology are just growing faster. We'll see moderating of gross margin. But beyond that, I'm not going to comment on sort of the mix within the gross margin

Operator

Your next call comes from the line of Craig Bijou with Cantor Fitzgerald. You may proceed.

Craig Bijou -- Cantor Fitzgerald -- Analyst

Great. Thanks for taking the questions. Maybe Kevin I wanted to start with the foot and ankle business. I wanted to see if you could parse that out and I think on the Q4 or parse out the growth for this quarter.

And I think on the Q4 call, you said that growth was trending maybe more in line with the market. So can we get your your updated thoughts there and what you guys are doing to -- is that how we should think about that business going forward kind of in-line with the market, or will there be innovation new products that is going to accelerate that over the next couple of years.

Kevin Lobo -- Chairman and Chief Executive Officer

Yes. We love our foot and ankle business as you know we've become sort of the market leader and on a par with the Wright Medical from a position five or six years ago where we really had a very small place in the market. And so we expect to continue to grow well. We do have a number of small innovations within foot and ankle, that will be launching this year. Just around out our portfolio, and we expect to continue to grow really in line with market potentially about market. We're the first to report so it will be we'll have to wait to see how everybody else comes in.

But it continues to be a strong grower for us. Within trauma, it obviously grows faster than the overall Trauma and Extremities business. And that was true again in the first quarter.

Craig Bijou -- Cantor Fitzgerald -- Analyst

Great. That's helpful. And as a follow up just on cementless knee, another metric that you guys have provided before. Wanted to see if you're still willing to provide the percentage of your knees that were cement less.

And then any updated thoughts after OUS going forward where that percentage can land.

Katherine Owen -- Vice President of Strategy and Investor Relations

Yes. So it continues to climb and that's part of the reason why,  if you look at our ortho number which includes robot sales, and bone cement. And declines in our bone cement revenue and that was one of the contributing factor that continues to ramp into the 30%. It was up sequentially and up year-over-year in terms of the penetration. We probably have a lot of runway. I don't think it's gonna get to the level that you see with hips, but certainly, we're expecting it to continue to climb.

Operator

Your next call comes from the line of Matt Taylor with UBS. You may proceed.

Matt Taylor -- UBS -- Analyst

Thanks for taking the question. So the first one I wanted to ask was, just about some of the leading indicators that you're looking at, that give you that confidence in rating the lower end for the year. You talked about the order book. Last time you gave a lot of detail on that across different businesses.

I was wondering if you could expand on that comment or anything else that you're seeing in the market that gives you good visibility that hope that we'll see sustained growth through the year.

Katherine Owen -- Vice President of Strategy and Investor Relations

A lot of the momentum that we had last year is continuing into this year. Keep in mind, we started the year with the highest organic revenue guide that we've had in over a decade at 6.5% to 7.5%. And despite some difficult comps, we came in this quarter at 73% organic growth. We have a number of businesses with healthy order book. And it's across the capital businesses, obviously end of big capital with 1688 roll out, while the big impact in the back half of the year. We're seeing great momentum across Indo with NOVADAQ as well, and make a momentum is continuing.

So it's really across the portfolio. When when you're as big and diversified it us there's always some challenges as we noted trauma, the full commercial launch of T2 is going to be closer to midyear. But across the board starting the year at 73% and the visibility we have across the businesses and product launches, It's really what drove us to have the comfort level and raising or tightening the range toward the higher end.

Matt Taylor -- UBS -- Analyst

Thanks. And just to follow up on the environment. I was wondering if you could comment if you've seen anything notable in terms of changes in customer behavior whether it's on the pricing side or in the market dynamics around insurance approvals or push back.

Katherine Owen -- Vice President of Strategy and Investor Relations

No. Literally nothing. No changes whatsoever.

Operator

Your next call comes from William Inglis with Piper Jaffray. You may proceed.

William Inglis -- Piper Jaffray -- Analyst

Thanks for taking the questions. Building up the previous OrthoSpace question, your sports med franchise has been one of your quieter growth drivers. I believe you called out your domestic share position as No. 3 in your recent Analyst Day.

Just curious if you have any sense of when you could be No. 2. And if there are any particular launches beyond the 1688 we should be thinking about this year is meaningful growth drivers or if it's just a combination of singles.

Kevin Lobo -- Chairman and Chief Executive Officer

Yes, as you know this our sports medicine business has had very strong double-digit growth for a number of years. As we've built out our implant portfolio, both internally developed as well as acquired through a number of smaller acquisitions, where actually the market leader and Hip arthroscopy on the heels of our pivot acquisition as well as the pivot Guardian table which we launched internally. And we still have room to grow in both knee and shoulder. We have a couple of shoulder product launches planned for this year that will bolster that part of the portfolio. So I expect continued strong double-digit growth out of sports medicine.

It didn't have a very strong first quarter. We still have runway to go,  and we're very pleased though to now be one of the leaders in sports medicine which clearly wasn't the case years ago. We continue to look for acquisitions there aren't as many sort of mid to larger-sized companies, so we tend to have to pick off small companies like you saw with OrthoSpace. But still plenty of room for innovation.

And we're excited about building our strength more in the knee and the shoulder. And the shoulder this year is a big priority with a number of new product launches.

William Inglis -- Piper Jaffray -- Analyst

Thanks for that. And just a general question on the ischemic stroke market. The early adopters of the expanded treatment window were certainly a nice [Inaudible] driver. Curious, what inning you think we're in in terms of patients having access and benefiting from the DoD guidelines and the cadence of patients being funneled to comprehensive stroke centers.

Katherine Owen -- Vice President of Strategy and Investor Relations

Yes, we're in the early stages there. This is the market that you're going to see swings in market growth quarter to quarter whether it's on new clinical data that comes out, or infrastructure bill. There's a lot of work that needs to be done to be able to get patients to the right Comprehensive Stroke Center for the right treatment. So that's market development that we, along with others in this market are doing together. But I think you're in the early innings in terms of the overall opportunity for a ischemic stroke device based treatments.

Operator

your next call comes from [Inaudible]. You may proceed.

Unknown analyst

Thanks. Two questions. No. 1, I was just hoping you might be able to give us a little bit of flavor on the capital environment in particular in medical that was obviously strong.

So just any thoughts on the backdrop there.

Katherine Owen -- Vice President of Strategy and Investor Relations

The overall capital environment whether its medical or other capital businesses continues to be favorable. I wouldn't say we've seen a big change from what we saw in 2018. It's healthy but capital varies. We have strong product cycles across a number of our businesses that have capital offerings, and some of that is specific to Stryker and against the backdrop of an overall stable hospital CapEx environment.

Unknown analyst

Okay. Perfect. And then Kevin, you sit in a unique position in the sense that you're CEO of a very large medical device company, you're also highly involved in Ad in the leadership there. So I was wondering if you might provide just some thoughts on what do you think is the reality or viability of a single payer system in the U.S..

Kevin Lobo -- Chairman and Chief Executive Officer

At this point in the political cycle, any comment would be purely speculative. I personally viewed the likelihood of Medicare for All is highly improbable.

Operator

Your next call comes from Matt Miksic with Credit Suisse.

Matt Miksic -- Credit Suisse -- Analyst

Hey guys this is Vic in for Matt can hear me OK? Hi, so just two questions. First, thanks for the helpful color on volumes, and on volumes and utilization for Mako. And just given how these trends are going we were hoping you could help us out and talk a little bit about the potential capacity and throughput at the current install base. Where you think you are now what you think that looks like over time. And any color you could offer on how long it takes for an average to reach some of those levels.

And then I have a follow up after that.

Katherine Owen -- Vice President of Strategy and Investor Relations

That's a really difficult question to give you some real analytics around that. It varies based on the surge, and it varies based on their volume, it varies based on the size of the sedition group. And generally though once you're trained and you don't come back into practice and start doing 100% of your knees or hips on Mako, you gradually ramp up as you get more comfortable. With the technology and we can see that can be anywhere from 12 months or so.

But again, that's an average for something that varies considerably. Though we do pay a lot of attention to the utilization rate. And this is why it's so important that when we place a robot that the surgeon champion and oftentimes that surgeon champion grows as other surgeons get exposure to the make a robot. And as I mentioned on the call, we continue to see strong growth year-over-year in utilization rates.

It has been increasing every quarter was up 30% year-over-year this quarter. And as we get more robots in the install base, we expect that to continue to grow. How big it eventually gets and that's difficult to say. But we do believe we have ample runway to continue to take market share for years

Kevin Lobo -- Chairman and Chief Executive Officer

And what I would say is that when they do reach capacity there always is the option of buying a second robot. And as we've mentioned previously about 10% of the hospitals where we have a robot have a second robot, and maybe a third robot. We have some [Inaudible] some systems are very large system that has four or five robots. So the ability to sell additional robots when the capacity is reached, is something that we can certainly continue to do.

Matt Miksic -- Credit Suisse -- Analyst

That's very helpful. And just one follow up on endoscopy and the potential impact of the 6088 camera, wondering if you could just kind of talk about any thoughts you have on driving further into the consumable space for some of these end markets like sports medicine or general surgery. Thank you.

Katherine Owen -- Vice President of Strategy and Investor Relations

For the camera, we feel really good about the impact as we roll that out down. And if you look at prior launches 1588, 1488, you'll see a very similar trend. Momentum builds in the first year particularly in the second half of the year, and it's really starting to hit its stride in the second full year. The launch and we would expect something very similar here and also helped by the NOVADAQ acquisition where we continue to see really strong momentum. And we've become a bigger player in sports medicine.

There's still a lot of room to go before we're a category leader, but we've brought innovative technologies in there and continue to see the benefit to the overall Indo business from Sports Medicine.

Kevin Lobo -- Chairman and Chief Executive Officer

And we had this 16 year on display at the Sage conference and received terrific surgeon feedback. The overlay of fluorescence imaging is really incredible. It's just a beautiful picture. We also improve the back lighting so that lends itself to better performance in ENT and sports medicine procedures as well as having a 4k picture as well as like light source.

So a lot of improvements in the 1688. We expect this to be a winner of a product launch,  just as you saw with 1588 we had terrific growth. As Catherine mentioned sort of picks up in the second year. But I would expect a strong second half of the year for endoscopy. And frankly we're very pleased with the first quarter given you 1588 was sort of toward the end of its cycle.

We had a strong performance in sports, strong performance in communications, and strong performance NOVADAQ. So we have a really great leadership team at Stryker endoscopy and I expect to continued strong performance.

Operator

Your next call comes from the line of Carroll Rose with Canaccord Genuity. You may proceed.

Carroll Rose -- Canaccord Genuity -- Analyst

Great. Thank you very much for taking the question. We touched on the extremities business with respect to trauma, and then on the sports side, I wondered if you could just talk a little bit about the overall shoulder recon market. I think you have some new products that are launched over the course of the next 12 months.

And just kind of know how you think about that market.

Kevin Lobo -- Chairman and Chief Executive Officer

Yes. It's a good market and we've been a very small player sub 10% market share player in shoulder.  I've been playing catch up on our product portfolio. We have a total shoulder , we have reverse shoulder, we have a fracture system and we're launching the short stem really right now in this in the second quarter on a limited basis. But more of an impact later, and we still don't have a Stemless shoulder that's in our pipeline.

We've been progressively adding to our portfolio. Our shoulder is growing well but from a admittedly a smaller base. But we do like the shoulder market and we now have a competitive product offering to start to gain business. And we're pleased with the performance so far.

We're excited about the short stem launch and we'll see again more of that result in the second half and you'll see in the first half.

Carroll Rose -- Canaccord Genuity -- Analyst

And then you're coming out of AOS, obviously a big focus on robotics. But there is another focus specifically related to procedural trends in the outpatient setting. I just wanted to see, you obviously have a good viewpoint there. You've given the product portfolio.

But how do you view the outpatient market now. I mean what really needs to happen to actually drive that as a catalyst to driving procedures there. And maybe have some broader perspective would be helpful. Thank you.

Kevin Lobo -- Chairman and Chief Executive Officer

Yes. We have mentioned this before that the trend toward outpatient will continue. I don't think there's any question about that overtime. But until Medicare provides coverage in the outpatient setting, you're not going to see a big spike.

They are covering it now in the hospital outpatient. But that's not the same thing as a surgery center. And so we haven't seen any signs of that happening at least not in the near term. But once that happens then I think that'll be the extra catalyst to drive a lot more volume.

Right now,  there's a lot of talk about shifting intensive care that the actual numbers are not that great at the current time. Clearly, we are present in the surgery center with our sports medicine business, and we expect the procedures will continue to graduate toward the surgery center. But I think the timing is really uncertain and for me the inflection point will be when we get Medicare coverage.

Operator

Your next call comes from Josh Jennings with Cowen.

Joshua Jennings -- Cowen and Company -- Analyst

Hi, Harris here for Josh appreciate that question. So to start on M&A is fine as a market where historically you have light category leadership. and as you progressed through kind of early integration of K2M, is this an asset that you believe can give you an upscale on the market over time, or do you see incremental emanate to kind of achieve that category leadership that Stryker typically aspires for.

Katherine Owen -- Vice President of Strategy and Investor Relations

Yes, you can imagine that the organization is totally focused right now on ensuring the successful integration of K2M, and we believe this is absolutely the portfolio, the offering, and the leadership team, and the selling organization that can get us to category leadership. So we would expect to be in a position where we're taking market share. And we've got that mid single digit target on a combined basis for this year and we expect it to accelerate after that. So the time frame to get to category leadership would be premature to state that but we absolutely believe this is the portfolio that will get us there.

Kevin Lobo -- Chairman and Chief Executive Officer

And what I would say is that every business of Stryker is on the hunt for new acquisitions. I think right now we're focused on integration,  but at some point I would think that the spine business will that come forward with some types of acquisitions to bolster their portfolio. As you saw with ENT, we did Entellus, and then within one year of doing Entellus, we've done [Inaudible]. So once we get into space we're not going to do one deal and then stop. I can't expect that we'll do a spine deal in the next six months.

We're gonna be very busy with integration. But beyond that if there's product holes in the portfolio that we'd like to fill in, every business of Stryker will cost we've been looking at rounding out their portfolio either internally developed or by acquisitions.

Joshua Jennnings -- Cowen and Company -- Analyst

Okay,great. And then separately, can you remind us of the upcoming Mako . Data says you expect to publish in the near term timing of that to your data set, and anything else worth highlighting.

Katherine Owen -- Vice President of Strategy and Investor Relations

Yes. So we're coming up on the three-year mark from the initial launch and so it would be hopeful we'll be getting closer to having two year follow-up data for the Mako Total Knee which is in the world of Orthopedics and joint replacement is near-term data. The timing of that it's tough to know. We have to hit the two-year mark, we have to crunch the data and then you've got to submit it. So whether or not it's at Arcos or AAOS or sometime in between.

I don't know yet, but that was probably one of the next data sets that we would anticipate.

Operator

Your next call comes from Jeff Johnson with Baird.

Jeffrey Johnson -- Baird -- Analyst

Thank you. Good afternoon. Just a couple of follow-up questions. Kevin, you mentioned Japan and Australia some sluggishness there, is that macro or anything else to call out.

Kevin Lobo -- Chairman and Chief Executive Officer

Yes, they had some success with their capital equipment, and to us that's just timing. We have very good businesses there they've been performing very well over a number of years. I expect that those business will pick back up for the remainder of the year really capital timing related to the Ortho business is fine.

Jeffrey Johnson -- Baird -- Analyst

Okay, thank you. And then on China it seems like stimulus efforts there might be helping macro in China a little bit. Are you seeing that or with the China strength you referenced more strike related.

Kevin Lobo -- Chairman and Chief Executive Officer

It's more strike related just given how small we. We're far from the market leaders in China. And so whatever progress we make we can make this kind of progress irrespective of any kind of stimulus efforts. It's just been turning to gain our fair share of the business.

Operator

Your next call comes from Steven Lichtman with Oppenheimer. You may proceed.

Steven Lichtman -- Oppenheimer -- Analyst

Thank you. Hi guys. So obviously most of Mako placements can continue to be in the U.S.. Just learning what you are seeing as potential for additional opportunities outside of the U.S.

Countries or regions where you see is ripe for expansion of Mako.

Kevin Lobo -- Chairman and Chief Executive Officer

We're really excited for the future of China and Japan. Those are gonna be two very good market. Today we only have approval for the hip in most markets. We need to get the new approvals which are pending right now. And then those will really take off as big markets.

We built a training center in Hong Kong in the fourth quarter of last year which we'll be using to train surgeons in those two markets. Those are really the those I'll call them the lagging markets. And even in India we sold our first Mako recently in India. That could be a good market as well. But the bigger the big markets that are really untapped so far, are China and Japan has really been because of regulatory it's just taken us longer to get Mako and approved in those markets but those are be great markets for long term got it.

Steven Lichtman -- Oppenheimer -- Analyst

Thanks, Kevin. And Glenn, I think you mentioned 0.50% basis points of headwind from acquisitions this past quarter. What are you looking for, for the full year on that score. What's embedded within guidance for full-year headwind.

Glenn Boehnlein -- Chief Financial Officer

Yes. We we typically don't give out that number because there's lots of acquisitions that are still needing to be integrated. What I will say is that you know over the past few years it's been around 0.50% basis points for full-year dilution. And my guesses based on the current set of acquisitions that we have right now in Q1 that we're trending very similar to that.

Operator

There are no further questions at this time. I'll now turn the conference over to Mr. Kevin Lobo for any closing remarks.

Kevin Lobo -- Chairman and Chief Executive Officer

Thank you for joining our call. As you can see our momentum continues, and we look forward to sharing our Q2 results with you in July. Thank you.

Operator

[Operator signoff]

Duration: 57 minutes

Call Participants:

Kevin Lobo -- Chairman and Chief Executive Officer

Katherine Owen -- Vice President of Strategy and Investor Relations

Glenn Boehnlein -- Chief Financial Officer

Bob Hopkins -- Bank of America Merrill Lynch -- Analyst

David Lewis -- Morgan Stanley -- Analyst

Vijay Kumar -- Evercore ISI -- Analyst

Richard Newitter -- SVB Leerink -- Analyst

Kristen Stewart -- Barclays -- Analyst

Robert Marcus -- J.P. Morgan -- Analyst

Lawrence Biegelsen -- Wells Fargo -- Analyst

Chris Pasquale -- Guggenheim Securities -- Analyst

Pito Checkering -- Deutsche Bank -- Analyst

Craig Bijou -- Cantor Fitzgerald -- Analyst

Matt Taylor -- UBS -- Analyst

William Inglis -- Piper Jaffray -- Analyst

Matt Miksic -- Credit Suisse -- Analyst

Carroll Rose -- Canaccord Genuity -- Analyst

Joshua Jennings -- Cowen and Company -- Analyst

Jeffrey Johnson -- Baird -- Analyst

Steven Lichtman -- Oppenheimer -- Analyst

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