Stryker (SYK) Q2 2019 Earnings Call Transcript

Stryker (SYK 0.09%)
Q2 2019 Earnings Call
Jul 25, 2019, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to the second-quarter 2019 Stryker's earning call. My name is Chantal, 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 with the 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 second-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 will 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.

With organic growth of 8.5%, our Q2 results reflect excellent momentum in all three segments: MedSurg, Orthopaedics and Neurotechnology and Spine. MedSurg delivered a roughly 12% organic sales increase with strong performances across the board. Instruments had a particularly strong quarter with 17% organic sales growth. And we were pleased with the performances in Medical, Endoscopy and Sustainability.

Looking ahead, we assume continued robust organic growth for all MedSurg divisions in the second half. Orthopaedics was up 6% in Q2, with Hips gaining 4% and Knees up roughly 6%, as Mako robot sales and increased robot utilization across both joint applications are driving implant share gains. Neurotechnology and Spine delivered 7% growth, powered by another quarter of double-digit gains in Neurotechnology. We have also made considerable progress in the integration of K2M and are on track with our full year growth target for Spine.

On a geographic base, the U.S. was up 9% and international was up 7%. We continue to see the benefits of our Transatlantic Operating Model with high single-digit growth in Europe. Given our lower market shares in this region, we are well positioned to continue to grow meaningfully above market in 2019 and beyond.

Our international performance also included strong double-digit gains in emerging markets. With the strong top line and ongoing focus on our cost transformation initiatives, we achieved operating margin expansion of 20 basis points, which includes considerable deal-related dilution. Our adjusted per share earnings in Q2 came in at $1.98, topping the high end of our targeted range of $1.90 to $1.95, which was driven by our robust sales performance. We also continue to benefit from investments in R&D, acquisitions, sales and marketing, which translate into healthy product pipelines and strong commercial execution.

That, combined with our talented employees and culture of performance, positions us well to sustain high growth going forward. With that, I will now turn the call over to Katherine.

Katherine Owen -- Vice President of Strategy and Investor Relations

Thanks, Kevin. My update today will focus on Mako and the key data points that allow you to track our success in executing on our Orthopaedic robotic strategy. In addition, we will continue to provide our new growth, which excludes any robot revenue. As a reminder, sales tied to Mako continue to be included in our other Orthopaedic revenue line, while Navigation is reported in Instruments.

In Q2, we sold 44 Mako robots globally with 35 in the U.S. By comparison, in the comparable quarter a year ago, we installed a total of 39 robots, of which 29 were in the U.S. Globally, our installed base of robots is north of 700 with close to 600 in the U.S. Looking at U.S.

procedures. In Q2, Mako Total Knee procedures exceeded 18,000, increasing approximately 80% from the prior year quarter, while total Mako procedures approximated 27,000. We're also pleased with the acceleration we are seeing in our Hip performance. These results reflect uptake for our new 3D-printed Trident 2 hip cup as well as increasing utilization of Mako for hip procedures where we achieved strong double-digit procedure growth in the quarter.

Based on these performances, it's clear we are continuing to see high demand for Mako given its unique features as well as applications that span hips, knees and uni, combined with a robust order book that positions us well to see ongoing success both in robot sales and recon market share gains. With that, I will now turn the call over to Glenn.

Glenn Boehnlein -- Chief Financial Officer

Thanks, Katherine. Today, I will focus my comments on our second-quarter financial results and the related drivers. We have provided our detailed financial results in today's press release. Our organic sales growth was 8.5% in the quarter.

As a reminder, this quarter included the same number of selling days as Q2 2018. As we have said before, selling days generally do not have an impact on the performance of our capital businesses. Pricing in the quarter was unfavorable 0.8% from the prior year, while foreign currency had an unfavorable 1.6% impact on sales. U.S.

organic sales growth was 9.3% and international organic sales growth was 6.5%. In the U.S., there were strong performances across Orthopaedics, MedSurg and Neurotechnology. International sales growth demonstrated solid gains in Europe, emerging markets and Australia. Our adjusted quarterly EPS of $1.98 increased 12.5% from the prior year, reflecting strong drop-through on sales growth combined with good operating expense control.

Our second-quarter EPS was negatively impacted by approximately $0.05 from foreign currency exchange rates, including translational and transactional impacts, which was consistent with our expectations at the start of the quarter. Now I will provide some highlights around our segment performance. Orthopaedics delivered constant currency and organic growth of 5.6%, including U.S. organic growth of 6.5%.

This performance was highlighted by strong performances in Knees at 6.6%, Hips at 5.4% and Recon capital of over 30%. Some of the key drivers of performance in the quarter included strong demand for our Mako TKA Knee platform, 3D-printed products and shoulder implants. Internationally, Orthopaedics delivered organic growth of 3.6%, reflecting strong growth in emerging markets. MedSurg continued to have strong growth across all businesses in the quarter with constant currency growth of 12.5% and organic gains of 11.5%, which included a 12.9% increase in the U.S.

Instruments had U.S. organic sales growth of 18.9%. We continue to see benefit from the sales force split with robust growth in power tools and waste management products. Endoscopy delivered U.S.

organic sales growth of 8.2%. Endoscopy's video business grew double digits as its new 1688 camera platform continues to ramp along with its NOVADAQ product lines. Medical had U.S. organic growth of 11.9%, reflecting solid performance in its bed, stretcher and Sage products.

Within Sage, we continue to see strong demand for Prevalon and PrimaFit. Internationally, MedSurg had organic sales growth of 6.2%, which reflects strong sales in emerging markets, including China. Neurotechnology and Spine had constant currency growth of 20.8% and organic growth of 7.4%. This growth reflects continued strong demand for our Neurotech products, offset by somewhat slower Spine organic growth as we continue to integrate our legacy Spine business with K2M.

Our U.S. Neurotech business posted organic growth of 8.9% for the quarter, highlighted by continued strong demand for our hemorrhagic, ischemic stroke, CMF and our Neuro Powered Instruments products. The Spine business continued to effectively focus on the K2M integration, including the field sales organization. During the quarter, we completed activities related to product training and cross-selling.

Sales exited the quarter with mid-single-digit growth in the U.S. Our IVS business continued to demonstrate strong double-digit growth trends. Spine remains committed to mid-single-digit growth for the full year. Internationally, Neurotechnology and Spine had organic growth of 12.4%.

This performance was driven by continued strong demand across most geographies for our Neurotech products. Now I will focus on operating highlights in the quarter. Our adjusted gross margin of 65.8% was down 30 basis points from the prior year quarter. Compared to the prior year quarter, gross margin was favorably impacted by productivity and efficiency, which was offset by price, foreign exchange and business mix.

R&D spending was 6.4% of sales, which was slightly favorable to the prior year quarter. Our adjusted SG&A was 33.5% of sales, which was 40 basis points favorable to the prior year quarter. This improvement reflects the continued focus on operating expense improvements through our cost transformation for growth program, including key projects focused on indirect purchasing and shared services. This is offset by the negative impact of acquisitions and continued planned investments in our CTG program efforts.

In summary, our adjusted operating margin was 25.9% of sales, which was approximately 20 basis points favorable to the prior year quarter. Our operating margin reflects good leverage and continued operational savings, offset by key investments and acquisitions. The latter of which had an approximately 30 basis points negative impact on the quarter. We remain confident in our ability to deliver on our full year commitment of driving 30 to 50 basis point improvement in our operating margin.

Next, I'll provide some highlights on other income and expense. Other expenses decreased slightly from prior year quarter primarily due to favorable interest income. Our second-quarter adjusted effective tax rate of 16% reflects our operating tax rate favorably impacted by the benefit related to stock compensation expenses. Focusing on the balance sheet.

We continue to maintain a strong position with $1.8 billion of cash and marketable securities, of which, approximately 40% was held outside the U.S. Total debt on the balance sheet was $8.5 billion. Turning to cash flow. Our year-to-date cash from operations was approximately $827 million.

This reflects strong net earnings offset by increases in core working capital and planned integration costs related to K2M. And now I will discuss our third quarter guidance. Based on our performance to date and anticipated strength in the remainder of the year, we now expect organic annual sales growth will be in the range of 7.5% to 8% for 2019. As a reminder, Q3 and the full year have one additional selling day, and Q4 has the same number of selling days as 2018.

Given our year-to-date performance and continuing momentum, we now expect that our adjusted net earnings per diluted share will be in the range of $8.15 to $8.25 for the full year. For the third quarter, we anticipate adjusted net earnings per diluted share to be in the range of $1.87 to $1.92. Foreign currency translation and transaction impact included in EPS is expected to be minimal in Q3 and negatively impacted by approximately $0.10 for the full year. And now I will open up the call for Q&A.

Questions & Answers:

Operator

[Operator instructions] Your first question comes from the line of Bob Hopkins with Bank of America. Please proceed.

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

Hi. Thanks. Good afternoon and congrats on a really strong revenue result here and strong result overall. I mean, I was intrigued by your comments on Hip growth and kind of the growing influence of Mako driving your Hip growth.

Could you just spend a second talking about the outlook for Mako and Hips? And is this the beginning of a stronger trend? Just trying to get a sense for where you think this is going. Thank you.

Katherine Owen -- Vice President of Strategy and Investor Relations

Thanks, Bob. We were pleased. We are seeing an increased Mako adoption for the Hip application. And some of it comes if they start to see the benefits from Knees, which could be the, in many cases, what drives the initial purchase.

They start to think about using it on more procedures, so it's kind of the natural evolution of the adoption. And I think when you combine that with our 3D-printed cup, it's a pretty powerful impact that we're seeing. So we think we're going to continue to see some strong gains in Hips on Mako as well as obviously with Knees.

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

Thank you for that. Then just one quick follow-up for Glenn on gross margins. Just curious if you could comment on where gross margins are going from here. I recognize that FX and mix were the drag this quarter, but maybe you could quantify FX and just given the really strong results, talk a little bit about where gross margins could go over the course of the rest of the year.

Glenn Boehnlein -- Chief Financial Officer

Yes, Bob, we typically don't guide on gross margin. But I'll tell you -- I mean, gross margin was negatively impacted primarily by price and product mix, especially as the business shifts toward MedSurg and Neurotech, if you look at sort of the growth rates across our businesses. And then, frankly, on the other side, those negative impacts were offset by newly acquired businesses as the Spine businesses have higher gross margins. We really expect progressive improvement in gross margin throughout the rest of this year and for the second half of 2019.

Operator

Your next call comes from the line of David Lewis from Morgan Stanley. You may proceed.

David Lewis -- Morgan Stanley -- Analyst

Good afternoon, Kevin. Just starting with you, maybe a quick follow-up. Instruments were much stronger than expected. And then given that the strength in 1688 in the back half for endo, what's driving that Instruments strength? And given the product catalyst for endo, can these two segments deliver double-digit performance in the back half of the year?

Kevin Lobo -- Chairman and Chief Executive Officer

So I wouldn't extrapolate Q2's Instruments results for the future quarters. We will have a very strong Instrument year overall, but it was particularly strong in Q2. Occasionally, we've seen this in the past where we've had, we'll call it, an extra pop in one quarter. But we do expect continued strong performance.

And think about the 1688, it's a progressive ramp. Normally, the second year of a camera launch tends to be the larger year, but we do expect Endoscopy to also have a strong second half. And it's sort of progressive. It will progressively build related to 1688.

So we're optimistic of a very strong MedSurg second half.

David Lewis -- Morgan Stanley -- Analyst

OK. And then Kevin, just Neurotech, the growth's been very stable the last three quarters. Momentum slowed a bit this quarter. Your pipeline is more impactful next year.

But anything that you'd call out either on share or market dynamics here now that the first half is in?

Kevin Lobo -- Chairman and Chief Executive Officer

Yes, so we're really pleased with our Neurotech business, continues to roll with strong performances globally. It was a little bit softer in the U.S. in the second quarter, but nothing particular that I'd want to call out. I would say that aspiration will much be more meaningful next year than it is this year, and I think we've talked a lot about that on prior calls.

No change to that.

Operator

Your next call comes from the line of Matt Miksic with Credit Suisse. You may proceed.

Matt Miksic -- Credit Suisse -- Analyst

Thanks so much. I also want to congratulate you on a really strong quarter. Following up on the robots in the quarter and the growth year-over-year, one of the questions we get often is just around how some of the other competitors in the space might be affecting decision cycles or anything like that in the field in terms of evaluations or RFPs. If you could just give us any color on that, and then I have one follow-up.

Katherine Owen -- Vice President of Strategy and Investor Relations

Yes. Thanks, Matt. We have not and don't expect to see any competitive impact. As I alluded to on the call, the order book is very robust.

We're seeing really strong uptake in terms of robot sales as well as the utilization rates. And you could see that in some of the data points provided in the quarter. So we are really pleased with what we're seeing within Mako and the fact that we're now really starting to see indications across all the joint procedures, reconstructive joint procedures starting to see more of a lift, too. So really good momentum.

Matt Miksic -- Credit Suisse -- Analyst

That's great. And then a follow-up on Spine. Approaching the sort of full year cycle of this integration on the front end as you've talked about and across operations, but one of the opportunities there, obviously, K2 had a pretty strong 3D-printed Spine implant portfolio. And I'm just wondering if you could talk a little bit about the opportunity or the time line for migrating that to your platform or expanding it under your umbrella or any efforts that you see as important opportunities to play out over the next 12 to 18 months.

Kevin Lobo -- Chairman and Chief Executive Officer

Yes. Thanks for the question. First of all, we only closed in November of last year. So I would call it more like the half-year mark right now.

Very pleased with the momentum and expecting acceleration in the second half of this year now that we've crossed sold the -- trained the reps on cross-selling and we continue to build the sets and the instruments needed for the K2M products for the legacy Spine reps. So we're excited about the outlook for the future. Certainly, we had that terrific 3D printing capability. And the CASCADIA line of products with K2M were also -- they had a very, very complete product line.

So we're really excited about having leadership in 3D printing and Spine. And we do plan to sell the full range of portfolio of products. As related to product and tech transfers, that's going to happen very gradually, and it's not something I really want to get into on the call right now.

Matt Miksic -- Credit Suisse -- Analyst

Fair enough. Thank you.

Operator

Your next call comes from the line of Josh Jennings with Cowen. You may proceed.

Josh Jennings -- Cowen and Company -- Analyst

Hi. Good afternoon. Thanks for taking the questions. I was hoping to start on margin.

I mean, clearly, it's a back half-weighted here year. And maybe you could just help -- I know you talked a little bit about it on the prepared remarks, Glenn, but maybe talk a little bit about the drivers in the back half that can get you out to the 30 to 50 basis points range. And I mean, should we be thinking about the lower end of that range? Or is there really no incremental guidance there?

Glenn Boehnlein -- Chief Financial Officer

Yes. At this point, I'm not going to commit to sort of a more detailed level of guidance other than to say that the 30 to 50 bps, we're still sticking to that. A couple of things that will help us. Obviously, things accelerate in the back half of the year in terms of sales and profits.

We'll also start to see less integration costs coming through from K2 and more results of their operations, which also should help the margin. And so those things combine really to give us confidence that we'll get to our 30 to 50 basis points.

Josh Jennings -- Cowen and Company -- Analyst

Great. And then just to follow up on Mako. Significant success in Knees, and it sounds like Hips are picking up. I just wanted to ask about the pipeline there.

And if there's nothing to share at this point, any time lines in terms of when you may share with The Street other indications that are in development? Thanks again.

Katherine Owen -- Vice President of Strategy and Investor Relations

Yes. Thanks, Josh. Nothing additional to share at this point. I think, as we've talked before, we're prioritizing our research efforts on new indications in Spine and in Shoulder.

But that's a ways off. And honestly, we have so much momentum right now in Knees and in Hips, increasingly, the organization is really focused on continuing to sell robots and build on that. Just really pleased, especially as we start to see hospitals purchasing additional robots being driven by those utilization growth rates that we're seeing. So that's going to continue to be the focus and what you're going to hear us primarily speaking about.

Operator

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

Chris Pasquale -- Guggenheim Partners LLC -- Analyst

Thanks. Start with the Trauma and Extremities business, it was a little bit softer than what we were expecting. I know last quarter, you called out the T2 delay. Has that product now launched? And how are you just feeling about the Trauma and Extremities businesses?

Glenn Boehnlein -- Chief Financial Officer

Yes. Chris, the product has launched. And if you look at it, Trauma had sequential improvement in U.S. sales growth as sort of as those new products begin to ramp-up.

We also saw improvements in the supply chain, which was one of the things that was slowing things a little bit. Moving forward, we expect that the sequential growth will continue to improve in the back half of the year. And so we're confident that it is going to get better.

Kevin Lobo -- Chairman and Chief Executive Officer

These launches just do take some time, so it's a -- there will be a gradual improvement in the availability of implants and instruments for the sales force. So it will progressively improve over the course of the year.

Chris Pasquale -- Guggenheim Partners LLC -- Analyst

That's helpful. And then just could you give us an update when your cementless mix stands in Knees today?

Katherine Owen -- Vice President of Strategy and Investor Relations

Yes. As we indicated on the last call, we're not going to give quite the level of detail. We -- as you heard in my prepared comments, we've given you, I think, a decent amount to be able to track robots. We're continuing to see uptake for cementless.

It does exceed 30%, but we're not going to get much more specific than that other than to say it continues to increase.

Operator

Your next call comes from the line of Robbie Marcus with JP Morgan. You may proceed.

Robbie Marcus -- J.P. Morgan -- Analyst

Great. Thanks for taking the question. Maybe I could follow up with another Spine question and just ask, we've seen so many integrations go by the wayside and have issues early on. What is it exactly that you're doing maybe differently? What have you learned that this integration is going according to plan?

Katherine Owen -- Vice President of Strategy and Investor Relations

Yes. I think it's several factors. We spent an enormous amount of time evaluating the market, the targets prior to making the decision to acquire K2M. We knew we had a strong cultural fit.

We did a lot of due diligence around why prior deals didn't work. And we also have been a very acquisitive company, which has really built up that muscle around thinking about how to integrate. And we also are very comfortable with hybrid sales models as opposed to some of the spine deals that forced a switch totally to direct. And so there were just a lot of lessons learned and our own core capabilities in M&A.

So there's been an enormous amount of work done by the organization in the first half of this year, a lot of integration efforts, but we're really pleased. And as we said, we remain on target or on track to hit our full year growth targets in the mid-single digits for Spine.

Robbie Marcus -- J.P. Morgan -- Analyst

And maybe just one for Glenn or Kevin. As you look at the med tech sector, you have plenty of balance sheet capacity to do more deals. What's your current view on the space and valuations? And what are your thoughts right now on M&A versus share repurchase? Thanks.

Kevin Lobo -- Chairman and Chief Executive Officer

As we've said from the beginning of being the CEO, that acquisitions will be the No. 1 priority for cash. And you've seen over whatever period you want to look at, three-year, five-year, 10-year, more than 50% of our cash does get deployed on acquisitions. We still have a very robust pipeline across our divisions of active targets.

Valuation is always a challenge. It's not a new challenge. It's been a challenge for the past few years, and that's why -- the No. 1 reason why we do walk away from deals.

We'll continue to be a disciplined acquirer, but we, right now, don't see any change in our capital allocation philosophy given the robust pipeline that we currently have.

Operator

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

Vijay Kumar -- Evercore ISI -- Analyst

Hey, guys. Thanks for taking my question and congrats on a really nice print here. Kevin, maybe a big-picture question on pipeline. Given the strength we're seeing, what would you highlight for us when we look at the next year? I know the camera launch and some of the products you spoke about.

Is there anything on Sage? I think I heard you guys talked about Sage. There was some talk about a new bed. Just help us out put these new product cycles in the context of a really strong capex environment.

Katherine Owen -- Vice President of Strategy and Investor Relations

Yes. I'll probably take that. I would tell you, across the board, whether it's 2019 or looking ahead to 2020, we have a number of product launches similar to prior years that are slated. And that includes Medical as well as other divisions.

So I think that really is what underscores our conviction in being able to grow sales at the high end of med tech. Don't want to get into specifics around the launches for obvious reasons, but I would tell you we have a really good cadence and pipelines across all three of the primary businesses.

Kevin Lobo -- Chairman and Chief Executive Officer

Yes. So we've shown a real sustainability of growth, if you go back four or five years, and it's been steadily building. And as our acquisitions roll in, they roll into organic growth, and that gives us the ability to continue to accelerate our growth. So right now, as we sit here today, I'm very optimistic thinking ahead to 2020.

Vijay Kumar -- Evercore ISI -- Analyst

And just one quick follow-up. Glenn, on the 3Q, was there an extra day for 3Q? So I'm just curious why EPS for 3Q would step down sequentially. Is there some timing element either on expenses or below-the-line items for the 3Q EPS figure?

Glenn Boehnlein -- Chief Financial Officer

Yes. It's just -- it's a little bit of seasonality. And I really don't think there's any one thing to point to relative to our guidance on Q3. And I think we'll continue with strong sales growth.

We obviously took up our range in sales growth, so we'll feel that come through. And we feel that, that level of performance in Q3 will be reflective of that sales growth.

Operator

Your next call comes from the line of Joanne Wuensch with BMO Capital Markets. You may proceed.

Joanne Wuensch -- BMO Capital Markets -- Analyst

Good afternoon and thank you very much for taking my question. Very nice quarter. I have a big-picture question, a specific one. Big picture, Kevin, do you have an opinion on where we're going with the Medical Device Tax?

Kevin Lobo -- Chairman and Chief Executive Officer

Yes. So obviously, we're expecting that the Medical Device Tax, that will not be reinstated. It's due to be reinstated at the beginning of next year. In our strategic plan, we assume it won't be.

That there'll be some -- there are a number of vehicles between now and the end of the year that it could be attached to. Full repeal, I think, is probably not likely. We're hopeful and we're lobbying through our trade associations for full repeal. But there's bipartisan support both in the Senate and in the House to not reinstate the Medical Device Tax.

So I believe we'll get some type of extension, whether it's two years or more. There's always a risk that it comes back, but I would handicap it as a low risk right now.

Joanne Wuensch -- BMO Capital Markets -- Analyst

Thank you. And then specific to your business, Trauma and Extremities, while better sequentially, is still not where I would expect it to be. What does it take to sort of move that up close to the market rate? Thank you.

Kevin Lobo -- Chairman and Chief Executive Officer

Well, certainly, we're not below the market rate, and we haven't been below the market rate for seven years. We outperformed the market very dramatically four or five years ago. We've moved a little bit closer to the market rate but I would tell you that the supply chain issues that we had in the first quarter are getting better. We're not fully healthy, and we have the short stem launch in Shoulder as well as T2 Alpha launches, which are gradually building.

And so we do expect an improvement sequentially in Q3 and Q4. And so the result was a slight improvement for Q1, and I do expect us to continue to improve going forward.

Joanne Wuensch -- BMO Capital Markets -- Analyst

Very helpful. Thank you so much.

Operator

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

Larry Biegelsen -- Wells Fargo Securities -- Analyst

Good afternoon. Thanks for taking the questions. One on pricing, one big picture. So pricing in ortho and MedSurg got better and to a point that we haven't seen in a while. So I'm just curious why that happened, the sustainability of it.

And is it -- how much was just due to lapping the Japan price cuts? And I had one follow-up.

Glenn Boehnlein -- Chief Financial Officer

Yes. Pricing was less negative in Q2 than we've seen in recent quarters. I think the most sort of recent impacts were felt from favorability in our implant businesses, but most of that came from positive mix from joint replacement and OUS pricing. And then we also saw some improvements in Spine pricing, but mainly because rebates have declined relative to our legacy Spine business.

Larry Biegelsen -- Wells Fargo Securities -- Analyst

Thank you.  And then Kevin, MedSurg accelerated across all segments, as you said. I'm just curious how much was driven by healthier end markets versus Stryker-specific drivers. And if you could just comment on what you're seeing just in the end markets Q2 versus Q1. It looks like Q2 may be a little more buoyant than Q1 in general.

Thanks for taking the questions.

Kevin Lobo -- Chairman and Chief Executive Officer

Yes. It's a little early in the reporting cycle to comment on the full end markets. I would tell you that MedSurg has historically, if you look at growth rates, has historically been based on our own performance, the launching of our products, the debt -- splitting of our sales forces. I look at Sage's great performance has really been after the -- following the recalls a while back, we've really gained momentum.

The PrimaFit launch is fantastic and going extremely well. And so a number of new product launches. That tends to be the reason for our success, and that's not any different in the second quarter. Of course, Instruments did really pour it on in the quarter, but they had a sales force split at the beginning of the year.

And they're really performing extremely well.

Operator

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

Pito Chickering -- Deutsche Bank -- Analyst

Good afternoon and thanks for taking my questions. I wanted to follow up on Instrument growth again. I think, if you looked at the stacked comps for 1Q '19 versus 2Q '19, it continues to accelerate. Can you give a little more detail on why waste management and power tools are growing this fast and how long this can continue?

Kevin Lobo -- Chairman and Chief Executive Officer

So I think we mentioned on the prior quarter call that we split our sales force. So there was one sales force selling power tools and waste management. Part of the catalyst for the split was the acquisition of Invuity, and so that was put together with waste management and some other products, and we call that part surgical technologies. And then the other part is called orthopaedic Instruments, which has the power tools, bone cement, the protective device, the protective gowns for the surgeon, and so a number of other products that are in that category, two different call points.

And that split of the sales force is going extremely well. And they have strong orders and converted those orders into strong sales in the second quarter. So we do expect a continued strong performance throughout the year. Again, I believe this was an outsized performance.

I wouldn't expect another number like this in the third or fourth quarter. But certainly, a strong number expected for the full year.

Pito Chickering -- Deutsche Bank -- Analyst

Great. And then for a follow-up, from a margin perspective, if you didn't have dilution from acquisitions, what type of SG&A leverage could you see when organic revenue growth is in the 7.5% to 8% range?

Glenn Boehnlein -- Chief Financial Officer

If there wasn't -- you said if there wasn't an impact from acquisitions, what kind of op margin growth would we have?

Pito Chickering -- Deutsche Bank -- Analyst

Correct.

Glenn Boehnlein -- Chief Financial Officer

Yes. I mean we usually disclose that number, so it really has ranged anywhere from -- if I add back the acquisitions, 50 to even 90 basis points of op margin expansion.

Pito Chickering -- Deutsche Bank -- Analyst

Thanks so much.

Operator

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

Craig Bijou -- Cantor Fitzgerald -- Analyst

Great. Good afternoon, guys. Thanks for taking the questions. You called out Shoulder implant growth in the script.

So wanted to just see if you could provide a little bit more color on what drove that strength in the quarter. And when you think about investment in your multiple businesses, how important or how much allocation of your investment -- internal investment, is going to the Shoulder business?

Kevin Lobo -- Chairman and Chief Executive Officer

I think you all know that we have a very low market share in Shoulder. We've progressively been launching new products over the past few years, so we have a primary shoulder or reverse shoulder fracture system, and now a shorter stem. We still don't have stemless, so stemless is still in our pipeline. That's coming fairly soon.

We also don't have a lot of international approvals for shoulder. We had some regulatory challenges, so this is primarily a U.S. business right now. But just on the back of these launches, we've gained a lot of momentum in Shoulder.

These are very good products, and it just takes time for our sales force to be able to get that in front of customers. And until you have a fairly full line -- we now have what I would call a full line. So even though we're missing stemless, it's -- that's not enough of an objection for our sales force not to be able to sell it. So we've been seeing very nice uptake in Shoulders over the past year or so, recognizing it's still a very small business within the overall Stryker picture.

But this is something we're excited about. It's a good market with a lot of growth potential, and we're going to continue to focus on it.

Craig Bijou -- Cantor Fitzgerald -- Analyst

And I'll stick with Shoulder for my follow-up. Just Kevin, I think in the past, you guys have talked about going to a specialty sales force for Shoulders specifically. Just wanted see if you have done that yet to any extent and the plans for the future if you have not.

Kevin Lobo -- Chairman and Chief Executive Officer

Yes. We have some specialization, but I would call it modest. There's obviously a huge cost burn every time you go to specialization, and you have to be able to drive significant revenue. We've done that in the past, as I already mentioned on this call, with Instruments dedicating -- splitting the sales force and going to specialization.

Shoulder procedures are really more fragmented. They're -- a lot of them are done by the same surgeons that do hips and knees. You do have some upper-extremity specialists, but the call point is a little more fragmented so it's not as obvious to go to a fully dedicated sales force. There's a huge SG&A burn to do that.

So I think this is one that would be a little bit more gradual where it makes sense. In certain MSAs, we'll go to specialized sales reps, but I wouldn't call it a full -- we're not going to go to a fully specialized sales force for some time.

Operator

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

Matt Taylor -- UBS -- Analyst

Hi. Thanks for taking the question. So you did touch on this in an earlier question, but I was hoping that maybe you could expound on the impact the Aspiration launch could have in neuro and other pipeline enhancements that could help that business moving through this year into next.

Katherine Owen -- Vice President of Strategy and Investor Relations

Yes. With Aspiration, as we're working to get the full range of products on the market, that's really the -- what's behind our comments around thinking about that having more of an impact in 2019. So we're looking at -- or excuse me 2020. So we're looking at launching a broader range of Aspiration devices than we currently have on the market around the Q1 time frame.

And so that's really how you should be thinking about the impact from that, our entry into that segment of the ischemic market.

Matt Taylor -- UBS -- Analyst

OK. OK. And then just on -- the Instruments growth was really impressive as most people have highlighted. When you look through to next year, how does the sales force split anniversary? Can you still grow strongly next year over this initial pop that you're getting?

Katherine Owen -- Vice President of Strategy and Investor Relations

Yes. I think what you're seeing is just some really strong momentum. It's from the sales force split. It's from acquisitions that have been integrated.

And it's from new product launches, from internal innovation and R&D, and all of that will continue into 2020. So I'm not going to get into specific numbers. And as we've commented before, this is certainly an outsized quarter, so you'll want to model accordingly. But there's a lot of momentum across Instruments and really across the organization.

Operator

Your next call comes from the line of Matt O'Brien with Piper Jaffray. You may proceed.

JP McKim -- Piper Jaffray -- Analyst

Hi. Good afternoon. This is JP on for Matt. I just wanted to touch on Spine for a second.

You mentioned that the K2 acquisition is kind of going as planned, but I wanted to see if you could touch on, first, just sales force attrition. And then for that business, the scoliosis summer months are usually pretty strong for them. So maybe while we're in the midst of it, comment on how you think your share's holding up in the scolio side of things?

Katherine Owen -- Vice President of Strategy and Investor Relations

Yes. I think it's a little early in the reporting season. You are right, June tends to be a strong scoliosis month. And you've heard comments from Glenn around the momentum we saw as we exited the quarter.

That really does underscore our confidence in the outlook for the full year. I don't think there's anything specific to get into around sales force attrition. One of the appeals of this target was the fact that we had a really strong cultural fit. We were bringing in a great leader with Eric.

We had minimal customer overlap. And we are comfortable with and continue to be a hybrid sales model, all of which were factors behind what we expected to be fairly limited attrition. So I think I'll just leave the comments there.

JP McKim -- Piper Jaffray -- Analyst

That's helpful. And then just one on just ortho. It's good all around, but the U.S. continues to outpace the OUS growth rates.

And just given how big the opportunity for you guys is OUS, is there anything you can do to, maybe on the investment side, to kind of accelerate that OUS ortho growth?

Kevin Lobo -- Chairman and Chief Executive Officer

I think the disparity that you're seeing is really related to Mako because we've had Mako on the market for quite some time in the United States. And we are really just launching Mako in two very important markets, China and Japan. We now have approval for the total knee in Japan as well as hip. In China, we have the hip approval.

We're still waiting for the total knee approval, which should be coming shortly. Those are going to be exciting markets for us. So we're just in the very, very early stages of that launch. So what you're seeing from a disparity from international to U.S.

is really the Mako effect, which is more pronounced in the U.S. but starting to grow, as you see, with our numbers. We are starting to place more and more robots outside the United States. But those two markets in particular, just getting started, and so we're excited about the future that Mako will be able to bring to those two markets.

Operator

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

Richard Newitter -- SVB Leerink -- Analyst

I want to ask about a question asked earlier on new indications for robotics. And I think you mentioned Spine and then Shoulder. And I don't want to read into this, or is there anything to read into in that ordering? I had been under the impression that Shoulder would potentially be in front of Spine even though you're not giving time lines precisely. Was there anything to that ordering? And then I have a follow-up on that.

Katherine Owen -- Vice President of Strategy and Investor Relations

No. Just the way the words came out of my mouth. Nothing to that. And again, they're both a ways off, and so I wouldn't read anything into that.

Richard Newitter -- SVB Leerink -- Analyst

OK. And so appreciating that they're both a ways off, I guess, you guys have been and brought the most attention to the orthopaedic robotic category through Mako. And you guys do not have a specific Spine robotic application, but you have some larger competitors -- some large competitors that are now coming into the marketplace, some new ones. I guess, what's the dynamic there being absent as the orthopaedic robotic market leader in spine? How are the conversations going there? Do you feel any sense of urgency? And then Katherine, by your last comment, it sounds like no.

And if not, why?

Katherine Owen -- Vice President of Strategy and Investor Relations

Yes. I think for us, the key for our Spine business was refreshing what had become a bit of a dated portfolio, getting a considerably larger organization and a real strong presence with the key opinion leaders, especially in the areas of deformity that shape a lot of their thought. That was the priority. What we think is imperative, much like we see with Mako in Knee, is you have to have a meaningful impact on the procedure, an application that really does change the dynamic for how the procedure is done, how it impacts the surgeon experience, and obviously, the patient experience.

That's what we're focused on in Spine, and we think there's a real opportunity there. We are not seeing any pushback in terms of our Spine presence by not having a robot at this point.

Richard Newitter -- SVB Leerink -- Analyst

OK. Thank you.

Operator

Your next call comes from the line of Steven Lichtman with Oppenheimer & Co. You may proceed.

Steven Lichtman -- Oppenheimer and Company -- Analyst

Thank you. Hi, guys. You mentioned continued solid emerging markets growth in your prepared remarks. Since you are still under-levered there broadly in emerging markets, is that an area you've been accelerating investments? And are there any particular product segments you see particularly opportunities in emerging markets?

Kevin Lobo -- Chairman and Chief Executive Officer

Given our presence in emerging markets, we have opportunity across our portfolio. And I'm really pleased with the progress we've made. Last year, we grew double digits. This year, it's strong double digits.

And really, the big change in the last, let's call it, six quarters is leadership. It's where we've really bolstered leadership in many of the countries in Brazil, in India, in China. We bought out our distributor in Turkey, and we're going a little bit more direct in Turkey. And in these markets, we're having really terrific growth.

So it really has been a leadership story, starting with the managing director in those countries as well as the next level down. And so it took us a few years to kind of get the leadership team that we wanted in place in these countries. And now, we're really started to drive growth across the portfolio.

Steven Lichtman -- Oppenheimer and Company -- Analyst

Thanks, Kevin. And Glenn, just I apologize if I missed this, but latest thoughts on free cash flow conversion and tax rate for the year?

Glenn Boehnlein -- Chief Financial Officer

Yes. We -- if you look at sort of free cash flow and the way cash flow played out. This quarter, we were a little under pressure, as we mentioned before, with the cash expenditures related to the K2 integration. And so we expected the first half of this year to be a little bit lower.

Typically, cyclically, cash flow generation is always higher in the second half for us. We also see ramping up of some of our initiatives around indirect spending, which will continue to deliver savings as well. We guide in the 70% to 80% conversion range, and we think we'll be near that range again this year. And then as far as taxes, there's really no change to our guidance of 16% to 17%, although we are moderating toward the lower end of that range.

Operator

Your next call comes from the line of Raj Denhoy with Jefferies. You may proceed.

Raj Denhoy -- Jefferies -- Analyst

Hi. Good afternoon. Thank you. Maybe one for Katherine just around Mako.

I'm curious when you think about the overall U.S. knee market maybe being in the very, very low single digits, you guys growing 6.5%, 7%. Of that delta, can you break out what percentage you think is pure kind of volume share gains versus any uptick you guys are getting, any mix benefit, price benefits you're getting from using robotics?

Katherine Owen -- Vice President of Strategy and Investor Relations

Yes. That's difficult to parse out. I mean I would tell you the bulk of it is coming from volume and market share gains. We're selling a significant percent of our robots into competitive accounts, obviously, because we wouldn't be able to grow if it was all into -- at these rates, it was all into Stryker accounts.

But we do get some modest mix benefit, but it's really -- it's powered, first and foremost, by Mako as well as our 3D-printed products, having them indicated -- our cementless knee indicated on the Mako robot is a pretty powerful combination. But to kind of break it down with specifics, that's just really challenging.

Raj Denhoy -- Jefferies -- Analyst

OK. But your point is that it is mostly share gains. That's the real big delta. It's not any mix benefit you're getting.

Katherine Owen -- Vice President of Strategy and Investor Relations

Yes, yes, that -- emphatically.

Raj Denhoy -- Jefferies -- Analyst

OK. And then just on those lines, I think the question was asked earlier, but you now do have a kind of major launch, or at least a launch for a major company, I should say, in robotics. Within those accounts, have you seen -- within the Zimmer accounts, has there been any change in tone of those customers being willing to entertain use of Mako or just really any change in the market broadly as it gets more competitive?

Katherine Owen -- Vice President of Strategy and Investor Relations

I would tell you when we look at the performance in the core, I think it's just simply too soon. We are not seeing a competitive impact. I think our results really do underscore just how strong our momentum is with robots. We have a very large installed base and building off of that.

We're just not seeing anything. Those questions probably better directed at them because obviously they're going to have better insights.

Operator

Your next call comes from the line of Jeff Johnson with Baird. You may proceed.

Jeff Johnson -- Robert W. Baird -- Analyst

Thank you. Good afternoon. Kevin, understanding your China presence is relatively modest. Any updates or color you can provide on maybe gating of procedural demand or demand for capital in that market just given some of the macro uncertainty here recently?

Kevin Lobo -- Chairman and Chief Executive Officer

Well, you're right. I think you're being generous by saying we have a modest presence. We have a long way to go in China. It's really the most important of the emerging markets.

And given our presence, we're really seeing Stryker being the rate-limiting factor, not the market. The market conditions are still, for healthcare, very good. And we just have to raise our game and -- which we've been doing over the last two years and really excited about the lever that we have there. But I don't see anything in the market that should cause us to slow down our momentum given where we are right now.

Jeff Johnson -- Robert W. Baird -- Analyst

All right. Great. And then Glenn, maybe just a clarifying question. You mentioned the Spine rebates coming down as one the helpful factors on pricing in the quarter.

I just want to -- is that an industrywide comment do you feel? Or is that a mix shift from older Stryker product to the K2 products that's helping that? Just wondering if it's more Stryker specific, that commentary, or broader market commentary? Thank you.

Glenn Boehnlein -- Chief Financial Officer

Yes. It's really the result of sort of our integration efforts and really a planned mix shift to the K2 products that we see really causing that impact.

Operator

Your next call comes from the line of Ryan Zimmerman with BTIG. You may proceed.

Ryan Zimmerman -- BTIG -- Analyst

Great. Thanks for taking the question. Katherine, you called out utilization up 80% in Knees on Mako, and I'm just wondering if you could speak a little bit to the disparity between users. Maybe what you see from the top users and how much of the installed base has capacity in terms of further utilization or further optimization on those robots?

Katherine Owen -- Vice President of Strategy and Investor Relations

Yes. So the 80% referenced the total Knee procedures that were done in the quarter. It's very difficult to give you color around that. I mean we see adoption really across the board, high-volume hospitals, lower-volume rural, urban, teaching hospitals.

It really -- it's driven, first and foremost, if there are robotic champion in hospital, and that's what drives the placement or the sale of the robot.

Ryan Zimmerman -- BTIG -- Analyst

OK. That's helpful. And then we've been asked a little bit before, but as a competitor does come into the market, how is the guidance contemplated in the sales cycle for Mako? Or what's the thoughts around an elongation of the sales cycle? Just given what we're seeing maybe in the spinal robotics market with an elongated sales cycle, do you anticipate that for the, maybe the remainder of the year or potentially into 2020?

Katherine Owen -- Vice President of Strategy and Investor Relations

Yes. I think it's simply too soon. We have no color on that launch. And so I think it's simply too soon.

So as we get closer to 2020, we'll certainly contemplate that. But I think, as you can see from our guidance, there's just a lot of momentum across the board and that we're just not seeing any impact.

Operator

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

Kyle Rose -- Canaccord Genuity -- Analyst

Great. Thank you for taking the question. Just wanted to ask another one on Mako. A lot of focus obviously on the competitive launch. But just wanted to see, have you seen any changes as far as how hospitals are looking to acquire and pay for them? I know you've talked about your Flex Financial in the past.

But are you seeing any that are looking more for utilization-based agreements and things along those lines?

Katherine Owen -- Vice President of Strategy and Investor Relations

No. Flex Financial has, for years, been a powerful tool for us when we're selling capital, and we can contemplate different models based on their -- what might be capital budgets versus operating budgets, leasing, et cetera. So we can look at a number and continue to look at a number of different models. But I wouldn't say those comments aren't any different today than they would have been a year ago.

Kyle Rose -- Canaccord Genuity -- Analyst

And then the one follow-up is just the outpatient market, both for Mako on the total Knees and total Hips but then also more broadly from an Orthopaedic joint replacement perspective. What are you seeing are the dynamics to that market?

Katherine Owen -- Vice President of Strategy and Investor Relations

Specifically, in the dynamics of, sorry, of the Mako uptake in Hips and Knees?

Kyle Rose -- Canaccord Genuity -- Analyst

Yes. In the outpatient environment.

Katherine Owen -- Vice President of Strategy and Investor Relations

We do sell some robots in the outpatient. It's the minority. They obviously have a keen interest in it because the outpatient hospital or ASCs, they like the new technology, and obviously, we're seeing more and more evidence of the impact this has for patients and outcomes, that drives their interest. They have different capital challenges.

And so again, we used Flex Financial to work with that. But the vast majority of the robots are not in the outpatient setting. They're still in the hospital-based setting at this time.

Operator

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

Kevin Lobo -- Chairman and Chief Executive Officer

Well, thank you for joining our call. As you can see, we had a very strong Q2 results and strong momentum going into the back half of the year. We look forward to sharing our Q3 results with you in October. Thank you.

Operator

[Operator signoff]

Duration: 54 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

Matt Miksic -- Credit Suisse -- Analyst

Josh Jennings -- Cowen and Company -- Analyst

Chris Pasquale -- Guggenheim Partners LLC -- Analyst

Robbie Marcus -- J.P. Morgan -- Analyst

Vijay Kumar -- Evercore ISI -- Analyst

Joanne Wuensch -- BMO Capital Markets -- Analyst

Larry Biegelsen -- Wells Fargo Securities -- Analyst

Pito Chickering -- Deutsche Bank -- Analyst

Craig Bijou -- Cantor Fitzgerald -- Analyst

Matt Taylor -- UBS -- Analyst

JP McKim -- Piper Jaffray -- Analyst

Richard Newitter -- SVB Leerink -- Analyst

Steven Lichtman -- Oppenheimer and Company -- Analyst

Raj Denhoy -- Jefferies -- Analyst

Jeff Johnson -- Robert W. Baird -- Analyst

Ryan Zimmerman -- BTIG -- Analyst

Kyle Rose -- Canaccord Genuity -- Analyst

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