Welcome to the Second Quarter 2019 Stryker Earnings Call. My name is Shantel, and I'll be your operator for today's call. At this time all participants are in a listen-only mode. Following the conference, we will conduct a question-and-answer session. [Operator Instructions] This conference call is being recorded for replay purposes. Before we 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. There is an exhibit to Stryker's current report on Form 8-K filed today with the SEC. I will now turn the call over to Mr. Kevin Lobo, Chairman and Chief Executive Officer. You may proceed sir.

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'll provide opening comments followed by Katherine with an update on Mako. Glenn will then provide additional details regarding our quarterly results before we open the call to Q&A. 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 a 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 US was up 9% and international was up 7%. We continue to see the benefits of our Trans-Atlantic 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 is 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 Katherine.

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 orthopedic 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 orthopedic revenue line, while navigation is reported in instruments. In Q2, we sold 44 Mako robots globally with 35 in the US. By comparison in the comparable quarter a year ago, we installed a total of 39 robots of which 29 were in the US. Globally, our installed base of robots is north of 700, with close to 600 in the US. Looking at US 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 are also pleased with the acceleration we are seeing in our hip performance. These results reflect uptake for our new 3D-printed Trident II 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 [indiscernible] 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.

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've 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. US organic sales growth was 9.3% in international organic sales growth was 6.5%. In the US, 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% 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 US 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 need 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 US.…

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

Hi. Thanks and good afternoon, and congrats on a really strong revenue result here and strong result overall. I was intrigued by your comments on hip growth and the kind of the growing influence of Mako driving your hip growth. Could you just spend a second, talking about the outlook for Mako in 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.

Thanks, Bob. We were pleased. We are seeing an increased Mako adoption for the hip application, if some of it comes, as they start to see the benefits from these, which could be the - in many cases what drive the initial purchase, they start to think about using it on more procedures. So it's kind of a 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.

Thank you for that. And 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 in 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?

Yeah. 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 towards med surgeon 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.

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

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

So I wouldn't extrapolate Q2's Instruments result 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 a -- 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-up related to 1688. So we're optimistic of a very strong MedSurg second half.

And then Kevin just Neurotech, the gross has been very stable over the last three quarters, momentum slowed a bit this quarter. Your pipelines more impactful next year, but anything that you call out either on share or market dynamics here, now the first-half isn't? Thanks so much.

Yeah. So we're really pleased with our Neurotech business continues to roll with strong performances globally. It was a little bit softer in the US in the second quarter, but nothing particular that I want to call out. I would say that aspiration will be much 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.

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

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 and 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.

Yeah. 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 can 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 and reconstructive joint procedures starting to see more of a lift to, so really good momentum.

That's great. And then follow-up on spine. You are approaching the sort of the 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 timeline 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?

Yeah, 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, very pleased with the momentum and expecting acceleration in the second half of this year. Now that we've cross sold at the -- train 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 a terrific 3D-printing capability and the cascadial line of products with K2M were also -- they had a very, very complete product line. So we're really excited about having leadership and 3D-printing in spine. And we do plan to sell the full range of portfolio of products. As it 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.

Fair enough. Thank you.

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

Hi, good afternoon. Thanks for taking the questions. I was hoping to just start on margin. I mean, clearly it's a back half weighted [indiscernible] and maybe you could just help. I know you talked a little bit about 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 basis points to 50 basis points range and I mean should be thinking about the lower end of that range or is there really no incremental guidance there?

Yeah. At this point, I'm not. I'm not going to commit to sort of a more detailed level of guidance other than to say that the 30 bps 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 cost coming through from K2 and more results of their operations, which also should help the margin. And so those things combined really to give us confidence that we'll get to our 30 basis points to 50 basis points.

Great. And then just a 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 timelines in terms of when you may share with the street, other indications that are in development? Thanks again.

Yeah. 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 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 on what you're going to hear us primarily speaking about.

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

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 do you just feeling about the trauma and extremities businesses?

Yeah, Chris. The product has launched and if you look at it, trauma had sequential improvement in US sales growth as sort of as well as 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 is going to get better.

These launches just do take some time. So it's 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.

That's helpful, thanks. And then just could you give us an update on where you are cementless mix stands in knees today?

Yeah. So, as we indicated on the last call, we're not going to give quite a 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.

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

Great. And thanks for taking the question. Maybe I could follow up with another spine question and just ask you, we've seen so many integrations go by the wayside and had 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?

Yeah, 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 model as opposed to some of the spine deals that forced a switch totally to direct. And so they were just a lot of lessons learned in our own core capabilities in M&A. So there has 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 on track to hit our full year growth targets in the mid-single digits for spine.

Thanks. 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 in valuations and what are your thoughts right now on M&A versus share repurchase? Thanks.

As we've said from the beginning of being the CEO that acquisitions will be the number one 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 number one reason why we do walk away from deals. We'll continue to be disciplined acquirer, but we, right now don't see any change in our capital allocation philosophy given the robust pipeline that we currently have.

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

Hey guys, thanks for taking my question and congrats on a really nice [indiscernible] here. Kevin, maybe a big picture question on our pipeline. Given the strength, we're seeing what would you highlight for us when we look at the next year? I know -- I know the camera launch and some of the products you spoke about. Is there anything on Sage? I think I heard you guys talk about Sage. There are some talks about a new bed. Just help us up put these new product cycles in the context of a really strong CapEx environment?

Yeah, 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 division. So I think that really is what underscores our conviction and being able to grow sales at the high end of MedTech. We 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.

Yeah. 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 role 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 2020.

And just add 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?

Yeah, it's just -- you know 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 feel that come through and we feel that level of performance in Q3 will be reflective of that sales growth.

Thanks, guys.

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

Good afternoon and thank you very much for taking the 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?

Yeah. So obviously, we are 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. Full repeal I think is probably not likely, we're hopeful, and we're lobbying through our trade association for full repeal, but there is bipartisan support both in the Senate and 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 is always a risk that it comes back, but I would tend to cap it as a low-risk right now.

Thank you. And then specific to your business trauma and extremities were better sequentially is still not where I would expect it to be, what does it take to sort of move that up to the market rate? Thank you.

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 from Q1 and I do expect us to continue to improve going forward.

Very helpful. Thank you so much.

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

Good afternoon. Thanks for taking the questions. One on pricing, one big picture. So pricing in ortho and MedSurg got better to a point that we haven't seen in a while. So, I'm just curious why that happened in the sustainability of it? And is it, how much was just due to lapping the Japan price cuts? And I had one follow-up?

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

Thank you. And then Kevin your MedSurg accelerated across all segments as you said, I'm just curious how much was driven by healthy or 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 maybe a little more buoyant than Q1 in general. Thanks for taking the questions.

Yeah, 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 the growth rates, it has historically been based on our own performance. The launching of our products, the debt [ph] splitting of our sales forces. I look at the Sage's great performance has really been after the following the recalls a while back, we've really gained momentum. The pre-method 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 port on in the quarter, but they had a sales force split at the beginning of the year and they are really performing extremely well.

Thank you.

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

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

So I think we mentioned on the prior quarter call that we split our sales force. So there was a 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 parts surgical technologies. And then the other part is called orthopedic 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's split of the sales force is going extremely well and they have a strong orders and converted those orders into strong sales in the second quarter. So we do expect to 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.

Great. Then for a follow-up from a margin perspective, if you didn't have dosing from acquisitions, which have an SG&A leverage, could you see when organic revenue growth is in the 7.5% to 8% range?

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

Correct.

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

Thanks so much.

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

Good afternoon, guys. Thanks for taking the questions. You called out shoulder implant growth in the script. So what don't you 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?

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, a reverse shoulder fracture system, and now a shorter stem. We still don't have so 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 US 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, 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 are excited about. It's a good market with a lot of growth potential, and we're going to continue to focus on it.

Thanks. 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 shoulder specifically. I just wanted to see if you have done that yet to any extent, and the plans for the future if you have not?

Yeah. We have some specialization, but I would call it modest. There is obviously a huge cost burn every time you go to specialization and you have to 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. 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 is 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 and certain MSAs will go to specialized sales reps, but I wouldn't call it a full. We're not going to go to fully specialized sales force for some time.

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

Hi, thanks for taking the questions. So you did touch on this on the earlier question. I was hoping that you could expand on the impact, the aspiration launch could have in neuro and other pipeline enhancements that could help that business moving through this year and into next?

Yeah, 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 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.

Okay. And then just on the instruments growth, was really impressive mostly 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 part that you're getting?

Yeah, I think what you're seeing is just really strong momentum, from the sales force split, 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, it is certainly an outsized quarter, so you want to model accordingly, but there's a lot of momentum across -- instruments and really across the organization.

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

Hi, good afternoon. This is JP [ph] on for Matt. I just want to touch on spine for a second. You mentioned that the K2 acquisition is kind of going as planned, but I want to see if you could touch on first just sales force attrition and then, for that business scoliosis summer months are usually pretty strong for them. So maybe while we're in the midst of it, comment on how do you think your share is holding up in the scoliosis side of things?

Yeah, I think it's a little early in the reporting season. You are right. June tends to be a strong scoliosis month and you heard comments from Glenn around the momentum we saw as we exited the quarter that really does underscore our confidence and 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 with 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 in factors behind what we expected to be fairly limited attrition. So I think I'll just leave the comments there.

That's helpful and then just one on -- just ortho is good all around, but the US continues to outpace the OUS growth rates and just given how big the opportunity for you guys is, OUS, is there any, you can do to maybe on the investment side to kind of accelerate that OUS ortho growth?

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 awaiting for the total knee approval, which should be coming shortly. Those are going to be exciting markets for us. We're just in the very, very early stages of that launch. So what you're seeing from a disparity from international to US is really the make-up FX [ph], which is more pronounced in the US. 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.

Your next call comes from the line of Richard Newitter with SBV Leerink. You may proceed. Richard Newitter\: Thanks for taking the questions. I wanted 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 the impression that shoulder would potentially be in front of spine, even though you're not giving timelines precisely. Was there anything to that ordering? And then I have a follow-up on that?

No, just the way to words came out right now. So nothing to that and again they're both a ways off, and so I wouldn't read anything into that. Richard Newitter\: Okay. And so I appreciating that they're both a ways off, I guess, you guys have been and brought the most attention to the orthopedic robotic category through Mako. And you guys do not have a specific spine robotic application, but you have some larger competitors that are now coming into the marketplace, some new ones. What's the dynamic there being absent as the orthopedic robotic market leader in spine? How are the conversations going there? Do you feel any sense of urgency, Katherine, by your last comment, it sounds like no and if no, why?

Yeah, 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. And what we think is imperative, much like we see with Mako and knee, as you have to have a meaningful impact on the procedure, an application that really does change the dynamic or 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 push back in terms of our spine presence by not having a robot at this point. Richard Newitter\: Okay, thank you.

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

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 the emerging markets?

Given our presence in emerging markets, we have opportunity across our portfolio and I'm really pleased with the progress we 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 leaderships, 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, staring 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 starting to drive growth across the portfolio.

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

Yeah, we -- if you look at sort of free cash flow in the way cash flow played out this quarter, we were a little under pressured as we mentioned before with 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 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 is really no change to our guidance of 16% to 17%, although we are moderating towards the lower end of that range.

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

Hi, good afternoon. Maybe one for Katherine just around Mako. I'm curious when you think about the overall US knee market maybe being in the very, very low single-digits, you guys are growing 6.5% to 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 benefit you're getting from using robotics?

Yeah, that's difficult to parse out. I would tell you the bulk of it is coming from volume and market share gains. We're selling a significant percent of our robot into competitive accounts obviously because we wouldn't be able to grow. If it was all -- at these rates it is all into Stryker accounts. But we do get some modest mixed 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 at the Mako robot is a pretty powerful combination, but kind of break it down with the specifics that's just really challenging.

Okay. But your point is that it is mostly share gains, that's the real big delta. It's not any mixed benefits you are getting?

Exactly.

Okay. And then just on those lines. I think the question was asked earlier, but you have a sort 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 Mako, it's really any -- any change in the market broadly as it gets more competitive?

Yeah, I would tell you, when we look at the performance in the quarter, 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. This question is probably better directed at them because obviously they're going to better insights.

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

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

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 health care 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 leader 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.

All right, great. And then Glenn, maybe just a clarifying question. You mentioned the spine rebates coming down as one of the helpful factors on pricing in the quarter. I just want to -- is that an industry wide 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.

Yeah, it's really the result of sort of the -- our integration efforts and really a planned mix shift to the K2 products that we see really causing that impact?

Thank you.

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

Great, thanks for taking my 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 the 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?

Yeah, so the 80% referenced 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, is there a robotic champion in that hospital and that's what drives the placement or the sale of the robot.

Okay. That's helpful. And then we have 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 elongating sales cycles. Do you anticipate that for the -- maybe the remainder of the year or potentially in the 2020? Thank you.

Yeah, 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 in that, we're just not seeing any impact.

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

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?

No, Flex Financial has for years been a powerful tool for us. When we're selling capital, when we can contemplate different models based on their what might be capital budget versus operating budgets and leasing, etc. So we can look at 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.

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 orthopedic joint replacement perspective, what are you seeing in the dynamics of that market?

Specifically in the dynamics, I'm sorry, of the Mako uptake in hips and knees.

Yes in the outpatient environment.

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 use 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 base setting at this time.

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

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.

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