Q1 2024 Stryker Corp Earnings Call

Participants

Glenn S. Boehnlein; VP & CFO; Stryker Corporation

Jason Beach; VP of Finance & IR; Stryker Corporation

Kevin A. Lobo; Chairman, CEO & President; Stryker Corporation

Andrew Christopher Ranieri; Equity Analyst; Morgan Stanley, Research Division

Caitlin Cronin; Analyst; Canaccord Genuity Corp., Research Division

Danielle Joy Antalffy; Analyst; UBS Investment Bank, Research Division

Joanne Karen Wuensch; MD; Citigroup Inc., Research Division

Joshua Thomas Jennings; MD & Senior Research Analyst; TD Cowen, Research Division

Lawrence H. Biegelsen; Senior Medical Device Equity Research Analyst; Wells Fargo Securities, LLC, Research Division

Matthew Charles Taylor; Senior Analyst; Jefferies LLC, Research Division

Matthew Oliver O'Brien; MD & Senior Research Analyst; Piper Sandler & Co., Research Division

Matthew Stephan Miksic; Research Analyst; Barclays Bank PLC, Research Division

Philip Chickering; Research Analyst; Deutsche Bank AG, Research Division

Robert Justin Marcus; Analyst; JPMorgan Chase & Co, Research Division

Ryan Benjamin Zimmerman; MD & Medical Technology Analyst; BTIG, LLC, Research Division

Samuel E. Brodovsky; Associate; Truist Securities, Inc., Research Division

Shagun Singh Chadha; Research Analyst; RBC Capital Markets, Research Division

Travis Lee Steed; MD; BofA Securities, Research Division

Vijay Muniyappa Kumar; Senior MD and Head of Medical Supplies & Devices and Life Science Tools & Diagnostics Team; Evercore ISI Institutional Equities, Research Division

Presentation

Operator

Welcome to the First Quarter 2024 Stryker Earnings Call. My name is Christine, and I'm your operator for today's call. (Operator Instructions) This conference call is being recorded for replay purposes.
Before we begin, I would like to remind you that the discussions during this conference call will include forward-looking statements. Factors that could cause actual results to differ materially are discussed in the company's most recent filings with the SEC. Also, the discussions will include certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release that is an exhibit to Stryker's current report on Form 8-K filed today with the SEC.
I will now turn the call over to Mr. Kevin Lobo, Chair and Chief Executive Officer. You may proceed, sir.

Kevin A. Lobo

Welcome to Stryker's first quarter earnings call. Joining me today are Glenn Boehnlein, Stryker's CFO; and Jason Beach, Vice President of Finance and Investor Relations. For today's call, I will provide opening comments followed by Jason with the trends we saw during the quarter as well as some product updates. Glenn will then provide additional details regarding our quarterly results before we open the call to Q&A.
In the first quarter, we delivered organic sales growth of 10% with double-digit growth in MedSurg and Neurotechnology and high single-digit growth in Orthopaedics and Spine despite one less selling day and tough comparables from a year ago. This reflects our team's continued strong commercial execution. Our results were led by very strong U.S. performance, notably in Instruments, Medical, Endoscopy, Trauma and Extremities and Mako. Internationally, growth momentum continued against strong double-digit growth organic sales comparables from the first quarter of last year. We expect this growth rate to accelerate for the remainder of the year as international remains a significant opportunity for us.
We delivered quarterly adjusted EPS of $2.50, reflecting 16.8% growth compared to the first quarter of 2023, driven by our strong sales performance and margin expansion. As anticipated, we began to accelerate our M&A activity. We just completed the acquisition of mfPHD, a leading provider of modular stainless steel wall systems. This further enhances our communications business unit portfolio within Endoscopy and helps us meet our customers' needs for turnkey operating room design and construction. At the end of the quarter, we also closed on our acquisition of SERF within our Hip business. Our deal pipeline is strong, and we expect to be active over the course of the year.
With one quarter behind us, we now expect an increased full year organic sales growth of 8.5% to 9.5%, and we are increasing our adjusted EPS range to $11.85 to $12.05 a share. Coming off organic sales growth of 9.7% in 2022 and 11.5% in 2023, this guidance demonstrates the durability of our high growth and is a testament to our commercial strength and extensive pipeline of innovation across the company. Also, it reinforces our ability to meet our target of 200 basis points of operating margin expansion by 2025.
Next, I want to thank our teams for their ongoing commitment to talent and culture, which is reflected in the recognition of Stryker for the 14th year in a row as one of Fortune's 100 Best Companies to Work For. Our operating model, talent and culture are true differentiators for us. In addition, we recently published our fourth annual comprehensive report, which captures our commitments and disclosures on corporate responsibility.
I will now turn the call over to Jason.

Jason Beach

Thanks, Kevin. My comments today will focus on providing an update on the current environment, capital demand and select product highlights.
Procedural volumes remained strong in the first quarter, in line with our expectations, driven by continued adoption in robotic-assisted surgery, demographics, a stable pricing environment and healthy patient activity with surgeons. And while pockets of supply constraints remain, our supply continues to be stable overall. Demand for our capital products remained healthy in the quarter with continued elevated backlog across our Endoscopy and Medical divisions.
Our Mako direct-to-patient campaign continues to perform well, which contributed to our very strong Mako growth with record first quarter installations in both the U.S. and internationally. This will continue to drive our Hips and Knees businesses. In April, we performed our first cases using the Pangea plating system in our Trauma and Extremities division and are gearing up for a full launch. Pangea is the largest launch in trauma's history as it offers a comprehensive system that will enable larger hospital conversions.
Next, we received approval from the FDA for our new LIFEPAK 35 defibrillator and monitor. This is a flagship product within our emergency care business unit and was one of the catalysts for our acquisition of Physio-Control. LIFEPAK 35 is a modern platform with a touchscreen interface that brings advanced connected capabilities to improve workflow. We will launch this product at the end of Q2, and it will have a multiyear benefit to our Medical division.
Lastly, Mako, Spine and CoPilot are pacing to launch in Q4, followed by the shoulder application at the end of the year. We continue to receive positive feedback from surgeons who have been exposed to these technologies.
With that, I will now turn the call over to Glenn.

Glenn S. Boehnlein

Thanks, Jason. Today, I will focus my comments on our first quarter financial results and the related drivers. Our detailed financial results have been provided in today's press release.
Our organic sales growth was 10% in the quarter compared to 13.6% in the first quarter of 2023. This quarter, we had one less selling day than 2023. The impact from pricing in the quarter was favorable by 0.7%. We continue to see a positive trend from our pricing initiatives, particularly in our MedSurg and Neurotech businesses, almost all of which again contributed positive pricing for the quarter.
Foreign currency had a 0.5% unfavorable impact on sales in the quarter. In the quarter, U.S. organic sales growth was 11.3%. International organic sales growth was 6.6% against a very strong comparable growth of over 16% in 2023. This performance included positive sales momentum across most of our international markets, particularly in the United Kingdom and Canada and most of our emerging markets.
Our adjusted EPS of $2.50 in the quarter was up 16.8% from 2023, driven by strong sales growth and operating margin expansion. Foreign currency exchange translation had an unfavorable impact of $0.05.
Now I will provide some highlights around our quarterly segment performance. In the quarter, MedSurg and Neurotechnology had constant currency sales growth of 12% and organic sales growth of 11.6%, which included 13.5% of U.S. organic growth and 6% of international organic growth. Instruments had U.S. organic growth of 19% with strong double-digit growth across the Orthopaedic Instruments and Surgical Technologies businesses.
From a product perspective, sales growth was led by almost 50% growth in smoke evacuation and strong performances in power tools, Steri-Shield, waste management and SurgiCount. Endoscopy had U.S. organic sales growth of 11.1% with double-digit growth in its communications and Endo BU businesses. And from a product perspective, standout growth included cameras, light sources, insufflators, booms and sports medicine implants.
Medical had U.S. organic sales growth of 16.8%, led by the solid sales performances in all 3 businesses. This included strong growth in stretchers, cots, Vocera and Sage products. Neurovascular had U.S. organic sales growth of 2.9%, highlighted by solid performances in our hemorrhagic stents and guidewires. Neuro Cranial had U.S. organic sales growth of 7%, driven by strong performance in our CMF business.
Internationally, MedSurg and Neurotechnology had organic sales growth of 6%, which included strong performances in our emerging markets. Orthopaedics and Spine had both constant currency and organic sales growth of 8%, which included organic growth of 8.3% in the U.S. and 7.4% internationally.
Our U.S. Hip business grew 6.8% organically against a very strong comparable of 16.2% in the same quarter last year. This growth reflects continued strong primary hip performance fueled by our Insignia Hip Stem. Our U.S. Knee business grew 3.1% organically against another very strong comparable of 20.7% in the first quarter of 2023. Our Knee growth reflects our market-leading position in robotic-assisted knee procedures and the continued strength of our installed base. Our U.S. Trauma and Extremities business grew 10.3% organic with strong performances across our upper extremities, biologics and core trauma businesses.
Our U.S. Spine business grew 3.9% organically, led by the performance in our Interventional Spine business. Our U.S. other ortho business grew 45.6% organically, driven by strong Mako installations in the quarter. Internationally, Orthopaedics and Spine grew 7.4% organically, including strong performances in Canada and most emerging markets, particularly driven by strong Mako installations.
Now I will focus on operating highlights in the first quarter. Our adjusted gross margin of 63.6% represents approximately 50 basis points favorability against the first quarter of 2023. This improvement reflects positive pricing trends as well as continued easing of certain cost pressures that we experienced in the first quarter of 2023. Adjusted R&D spending was 6.8% of sales, which was 30 basis points higher than the first quarter of 2023. Our adjusted SG&A was 35% of sales, which was 60 basis points lower than the first quarter of 2023 due to continued discipline in our spending and investments to support our growth.
In summary, for the quarter, our adjusted operating margin was 21.9% of sales, which was approximately 80 basis points favorable to the first quarter of 2023. Adjusted other income and expense of $49 million for the quarter was $16 million lower than 2023, driven by favorability in interest rates and a higher level of invested cash resulting in higher interest income.
The first quarter of 2024 had an adjusted effective tax rate of 12.3%, reflecting the impact of our geographic mix and certain discrete tax items. For 2024, we still expect our full year effective tax rate to be in the range of 14% to 15%.
Focusing on the balance sheet. We ended the first quarter with $2.4 billion of cash and marketable securities and total debt of approximately $13 billion. Our total debt includes $600 million of debt that is due to be repaid in May and has been prefunded.
Turning to cash flow. Our year-to-date cash from operations is $204 million, reflecting the results of net earnings and normal first quarter seasonal cash outflows. Considering our first quarter results, strong procedural volumes and healthy demand for our capital products, we now expect our full year 2024 organic sales growth to be in the range of 8.5% to 9.5% with the pricing impact to be roughly flat. If foreign exchange rates hold near current levels, we anticipate sales will be moderately unfavorable impacted for the full year, being more negative in the first half of the year. EPS will be negatively impacted at the higher end of our previously guided range of $0.05 to $0.10. With our momentum heading into the rest of the year and our commitment to expanding operating margins, we now expect adjusted net earnings per diluted share to be in the range of $11.85 to $12.05.
And now I will open up the call for Q&A.

Question and Answer Session

Operator

(Operator Instructions) Our first question will come from Robbie Marcus with JPMorgan.

Robert Justin Marcus

Congrats on a really nice quarter. A lot to ask about, but maybe 2 for me on financials. First, Kevin, it sounds like procedure volumes remain really healthy across the globe, and capital equipment, same. Would love to hear if you're seeing any changes, either up or down, in the environment for capital and procedure volume growth.

Kevin A. Lobo

Yes. Thanks, Robbie. Yes, we're really pleased with the performance in the first quarter, and really nothing has changed. So the good level of volumes that we're seeing in procedures that we saw through 2024 has continued into 2025. And our capital order book remains very strong. So capital equipment, whether it's large capital or small capital, remains very robust. We have a nice healthy backlog, and that gives us the confidence to raise our organic sales growth guide for the full year.

Robert Justin Marcus

And maybe one, probably hasn't been asked on in a while, but your Spine business had a really nice quarter. I wanted to see. Is that more fundamentals and the improvements in technology you've brought to market? Is that gaining some share from disruption of the competitor merger? And is that giving you a foothold ahead of the Spine Mako launch and discussions and how hospitals are open to that?

Kevin A. Lobo

Yes. Thanks, Robbie. Not a major change. I would tell you the Interventional Spine business had a terrific quarter. That was really high growth. Our enabling technologies within Spine, the Q Guidance System has really picked up good momentum as well. The Mako Spine and the CoPilot won't be launched until the fourth quarter. So that's not really having much of an impact. And I wouldn't say that the competitive disruption or the competitive merger is really having much of an impact yet. It's still very early days. So nothing too remarkable, but overall, a good number and a good solid number for our Spine business.

Operator

Our next question comes from Lawrence Biegelsen with Wells Fargo Securities.

Lawrence H. Biegelsen

Congrats on a nice quarter here. One for Glenn, one for, I think, Kevin. Glenn, just maybe on the EPS raise of about $0.10 at the midpoint. Can you help us bridge kind of how much of that was operational? How much of that is coming from kind of below the line, other income being a little lower? And obviously, FX is a greater headwind. So just kind of the pieces that led to the $0.10 raise, and I had one follow-up, please.

Glenn S. Boehnlein

Yes. Sure. Thanks, Larry. I think if you look at sort of what happened in OI&E and also what happened with our tax rate, obviously, we had some favorability just for this quarter. I think fundamentally, we're still targeting $250 million roughly in OI&E and attach rate that really is still between 14% and 15%. So we're still sort of holding to the below the op margin line sort of guidance that we had built into our initial guidance that we provided back in January.
I think, honestly, if you look at the raise in terms of how we think about it, the robustness of the top line, obviously, the earnings that we're able to kick off of that. And then lastly, we're just -- we're feeling that we're seeing good momentum and positivity around the programs that we put in place to drive leverage to get back to that 2019 number. And so all of that really combines to really give us the confidence to give us that $0.10 raise from the midpoint in EPS.

Lawrence H. Biegelsen

That's helpful. And Kevin, I'm sure you know investors are concerned about the potential impact of da Vinci 5 on your Endoscopy business. Obviously, it's not having any impact right now. Really strong growth here. I'd love to hear from you kind of if you're willing to share kind of what the potential exposure is and what you can do to help protect your lap tower business long term.

Kevin A. Lobo

Yes. Thanks. I'm a little bit mystified by this concern, to be honest with you. If you attended the Sage's meeting, you could clearly see that we have a very differentiated solution that will frankly enable -- they can grow at whatever rates they're growing with their new product, and we're going to continue to have a very strong performance in endoscopy, both this year and for years to come. The overlap in our businesses is minor. We are multi-specialty. We play -- and most of our procedures, frankly, aren't being done robotically today. We also are the clear leader in fluorescence imaging.
Just most recently, we had the American Association of Thoracic Surgery, where we partner with CYTALUX, this new fluorophore, to be able to light up lung cancer for lobectomy procedures, which we're the only company that can do that, that can light up that fluorophore. So surgeons are going to demand this for safer surgery, but that doesn't mean that Intuitive can't grow with their robot. We are really playing in spaces with very little overlap, and both of us can continue to have very strong performance for many, many years to come. So to me, this concern is, frankly, mystifying and not at all for me a concern for our Endoscopy division.

Operator

Our next question comes from Ryan Zimmerman with BTIG.

Ryan Benjamin Zimmerman

I want to ask about the organic growth and the guidance. If you look at the 10% organic growth this quarter versus the comps and kind of where you're guiding that 9% at the midpoint, the comps essentially do get easier through the balance of the year. And so I'm wondering. Kevin or Glenn, whoever wants to take this, just talk about your guidance view or philosophy for the top line, specifically given the performance and what you think could be better performance for the remainder of the year.

Kevin A. Lobo

Yes. Great. So certainly, if you look at our fourth quarter last year, I wouldn't think that, that was -- those were easy comps. We had a pretty monstrous fourth quarter last year. And so comps is probably the biggest concern that we have, and we do pick up an extra selling day in Q3 and extra selling day in Q4. It's only one quarter, right? There's a lot of uncertainties out there in the marketplace. We feel very good about our business. And I think this is an appropriate raise at this time. Let's see how things go at the end of the second quarter, and we can update you further on the outlook for the year.

Ryan Benjamin Zimmerman

Fair enough. And Kevin, your comments on M&A were pretty pointed. You've highlighted a number of areas previously. I think there was 5 that you specifically called out before. Are you reinforcing those same areas today? Because if I look at just some of the tuck-ins that you've done, it's actually been outside those 4 or 5 areas as of late. And so just curious kind of how you're thinking about the targets for the areas for M&A today.

Kevin A. Lobo

Yes. Certainly, when I talk about those 5 areas, those are adjacencies. So we have our core basically supplementing our existing businesses with new technology. That's always going to be the majority of the deals we do. And beyond that, as we think about adjacencies, those are what I'm calling my sort of top 5 priority adjacencies. And what I'd tell you right now is we have an incredibly healthy pipeline of deals.
Now of course, pipeline doesn't always get realized, right? There's always a washout rate as you go through these processes. But I'm feeling really excited about the pipeline. They are mostly in the tuck-in variety. And so they're just like the one I mentioned for our communications business or our Hip business. You're going to see most of those occur at least for the next couple of quarters. Beyond that, if we do decide to branch out, those other areas I talked about are still of high interest. Nothing has really changed on that front.

Operator

Our next question comes from Joanne Wuensch with Citibank.

Joanne Karen Wuensch

Very nice quarter. Could you unpack 2 particular areas? One is the Instrument sales up 18%. And then the other is other, up 44.2%. Both of those are real bright, shining stars. I'd love to hear what went behind that.

Kevin A. Lobo

Yes. Sure. I can start on the Instruments, and I'll let Jason talk about the other ortho. And you're right, these are bright, shining stars. The Instruments division had a fantastic quarter, and it was really, really across both Surgical Technologies as well as Orthopaedic Instruments. Really across the board.
And if you look at smoke evacuation, we just continued to have tremendous momentum. Obviously, the market has been growing very robustly. But we have a terrific commercial execution, growing almost 50%, which is really awesome. And that was great growth in the U.S. and also really great growth internationally. And we see that continuing, maybe not at 50%, but we see that very high double-digit growth through the rest of this year and into next year, especially as more states decide to mandate smoke evacuation. So that was really a big push.
We also have the SurgiCount, plus we've launched a new product that combines the Gauss Surgical quantification of blood loss as well as the sponge counting. So it's all combined into one solution, which is really elegant and really being well received by our customers. So those are probably the 2 biggest catalysts within Surgical Technologies. Neptune waste management continues to roll, but that's not new information.
And then if you flip over to Orthopaedic Instruments, we have the Steri-Shield doing extremely well. Our power tools, obviously, you know about the new launch that's still, let's call it, just a little -- about 1.5 years in. That's continuing to do very well as well as pulsed lavage and all the other products and just really great commercial execution by the Instruments team. It's really been a flagship division of Stryker, if you go back the last 10-plus years. It delivers very, very consistently, and it did so again in the first quarter.

Jason Beach

Yes. Joanne, it's Jason. I'll take the other ortho here. So just a couple of additional comments, I guess, to my prepared remarks would be, like I said, we had a record quarter of installation in the first quarter this year. If you remember, we had a record quarter in the fourth quarter of last year. So the momentum is going really well on the Mako front. I commented on the direct-to-patient campaign. We've seen really good results out of that. So we feel good about it, and we like what this will translate in terms of the Hips and Knees business as we move forward as well.

Operator

Our next question comes from Pito Chickering with Deutsche Bank.

Philip Chickering

Looking at the international growth, can you talk about what you're seeing in Europe versus the higher growth markets like Japan and China? And how should we think about the growth internationally if we're using the 6.8% seen this quarter on a constant currency basis?

Kevin A. Lobo

Yes. So certainly, Europe continues to be a growth engine for Stryker. I would tell you in the first quarter, it was a little bit softer than it has been, and that was really because we had a big quarter last year. So really more comp related. I do expect Europe is going to continue to pick up in Q2, Q3, Q4. So the overall run rates are really healthy in Europe. And we -- the U.K. was a bit of a standout in the first quarter, but the other regions are all going to be fine. We had a really big, big sales in Germany and Southern Europe last year and so -- in the first quarter. So to me, it's just a comp issue. I'm not at all concerned about our international. We're going to have another strong year in international. So you talked about Europe. What else did you say, sorry? [Was it all] Europe?

Philip Chickering

Great. And then the second question was strong utilization across the country for hospitals and good margins. We're seeing hospitals want to increase their CapEx spending. I guess what areas of your portfolio do you think sort of has the most upside for hospitals increase in the CapEx dollars?

Jason Beach

Yes. Pito, I guess what I would say here, as we look at the overall capital environment, and you can see in our results in the first quarter in our capital business is very strong. So we see opportunities here across the board. I think we mentioned that our backlog continues to be elevated here. So we expect strong capital as we go throughout the year.

Operator

Our next question comes from Shagun Singh Chadha with RBC Capital.

Shagun Singh Chadha

Kevin, you've talked extensively about the super cycle of innovation, and we are seeing strong results here in Q1. Are you able to quantify contribution from new products in Q1? Perhaps talk to us about what's factored into your guidance for 2024. And I guess the key question is, how should investors think about growth drivers for Stryker beyond the current super cycle of innovation? I think you've indicated year 2 and 3 are the peak years. And I think you'd get there in '24 and '25. So how should we think about growth drivers beyond that?

Kevin A. Lobo

Yes. Thanks for the question. What I would tell you is we're in this constant rhythm of innovation. And we just had a number of products sort of collide at the same time, but they're constantly being refreshed. So I wouldn't think about this as a fleeting moment. If you think about 9.7% in '22, 11.5% in '23, another potentially double digit, we'll see. We're not guiding to that just yet, but we have a chance certainly to get to another double-digit growth this year, and next year, you're going to have the impact. We're just launching LIFEPAK 35. It's not going to have as much of an impact this year as next year. Pangea not as much impact this year as next year. The Mako applications have really no impact this year. It's really more next year. And then we'll just keep rolling other innovations on top of that.
So I would just think we were in a rhythm. Assuming the market conditions stay similar, we're in a rhythm where this kind of high growth is what you should come to expect from us with no end in sight as long as we continue to invest as we are, roughly 7% of our growing top line in new product innovation, and we continue to be active with acquisitions because as you know, we acquire high-growth assets. And then after the first year that rolls into organic growth, we had a bit of a pause last year as we're going to refill that tank this year, and that will contribute to organic growth in the years ahead. So I would not look at this as some kind of we reached a peak, and we're starting -- we're going to come down on the other side. Absent some kind of market adjustment, this is -- we're in kind of a new normal, at least for a while.

Shagun Singh Chadha

That's really helpful. And then just a couple of follow-ups on the ortho side. Just any updates on Mako for spine and shoulder robot? Are you still on track for 2024 and a year-end '24 launch for both of those?

Jason Beach

Shagun, it's Jason. Just -- I'll go back to my prepared remarks, right? As we think about Mako Spine and CoPilot, we're looking at a Q4 launch there. And for Mako shoulder, it will be the end of this year from a launch standpoint.

Operator

Our next question comes from Vijay Kumar with Evercore.

Vijay Muniyappa Kumar

Kevin, I had one for you on the backlog comments here, both on the procedures and the capital side, right? On procedures, (inaudible), can you comment on any scheduling? I think historically, scheduling was taking time. It was elongated. Have you seen any shortening of that scheduling still elongated? How have cancellations sort of trended? I think on the capital side, you mentioned LIFEPAK. Did that contribute in the backlog? Or is that something that's supposed to come in the coming quarters?

Kevin A. Lobo

Look, I'd just call it a stable market. It really hasn't changed much, if you think about waiting lists. If you think about staffing, it's continually gotten better over the course of '24. So I would just say it's very stable in terms of the overall market. I don't see shortening at all. I don't see it elongating. It's just as we saw through '24 -- '23, sorry, it's a continuation into '24 of that kind of stable marketplace.
And the new defibrillator just got approved. So that's not really been a big contributor to our backlog. Our backlog is just a healthy order book of all of our existing products across medical, across even some of the Instruments businesses and Endoscopy. So it really -- there wasn't any kind of new spike, but we've had a healthy backlog. We had it going into '23. We have it going into '24. We continue to get good orders.
So yes, we're shipping out at a nice rate, but the orders are still coming in at a very healthy rate. So we're really not burning through any kind of meaningful backlog, and that gives us confidence for at least through the rest of this year if -- and as orders continue, and it obviously could potentially spike with some of these new products. That's only going to give us more tailwind for growth.

Vijay Muniyappa Kumar

That's helpful, Kevin. And Glenn, maybe one for you. Free cash in the quarter looks like there was some timing element. Can you just remind us what kind of free cash conversion should we be expecting for fiscal '24?

Glenn S. Boehnlein

Sure. Yes. I think in Q1, what you saw was just timing between working capital in Q4 and Q1. And then just sort of seasonally in Q1, we have higher cash outflows that occur. So that's the impact of that. On an overall basis, there's no change to the targets that we discussed back at the analyst meeting in November, and that would be the 70% to 80% free cash flow conversion number.

Operator

Our next question comes from Travis Steed with Bank of America.

Travis Lee Steed

Congrats on a good quarter. On the Mako installations, curious -- big insulation number, but curious how many of those are going into competitive accounts. And is that a leading indicator for share gains in ortho?

Jason Beach

Travis, it's Jason. I mean for competitive reasons, we won't necessarily disclose the number in terms of the amount going into competitive accounts. But I will say that number is big for us and continues to be a winner for us in terms of going into competitive accounts.

Travis Lee Steed

Great. And then the 50% growth in smoke evacuation, was that a big step change versus where it's been running at? And I'm just curious if there was something that drove that acceleration in smoke evacuation, if it's kind of better bundling across the portfolio or more reps pushing that product.

Jason Beach

Yes, Travis, it's Jason. I'd say a couple of different things here. The smoke evac business has continued to be, I think, high teens, 20% grower. In smoke-free states, it's higher than that and similar to kind of what we said today in the prepared remarks. So it's been a great tailwind for us, and we think it will be into the future.

Kevin A. Lobo

Yes. We've also had our supply chain has really improved in terms of being able to meet the tremendous demand that we've had, and that was also a contributor. So we've had tremendous growth, tremendous demand. And our supply chain has really kicked in, in a strong way, and that puts us in a good position not only to deliver in the first quarter but also to deliver in the quarters ahead.

Operator

Our next question comes from Matthew O'Brien with Piper Sandler.

Matthew Oliver O'Brien

Just real quick, it sounds like Mako is getting -- Mako Spine is being pushed out. Just I don't know if it's 3 to 6 months. Is that about right? And then is it a software issue, hardware issue, something else you're going to incorporate into it that's causing this modest push?

Jason Beach

Matt, it's Jason. I mean keep in mind, right, from a regulatory standpoint, there's time lines as it relates to the FDA that can shift things by week, sometimes a couple of months. We've always been targeting a back half launch here. So I wouldn't consider this as a significant change in the time line. As you think about the guidance that we have for this year, there was certainly nothing assumed in terms of our guide relative to the spine or shoulder launch. So no impact there as we think about that.

Matthew Oliver O'Brien

Got it. And then on the MedSurg side of things, I think, Kevin, you've said double-digit growth is what you expect for the next 5 years there. Is that needing to have the backlog? And I mean is there any way to quantify how significant that backlog is right now and how much of a tailwind it is versus all these new products that you got coming like defibrillators, et cetera? Because the Street is nowhere near double-digit growth for the MedSurg business over the next couple of years.

Kevin A. Lobo

Yes. Look, I don't think I said that. I have to double check the transcript, but I didn't give a precise number of double-digit growth for all that time. What I did say is we are in this high-growth environment based on our innovation cycle, and we're going to continue to have these new products fuel growth. It does depend on the market, right? So if the market stays at this kind of level, could we stay in that kind of double-digit range? Sure, we could. But I -- there's no guarantee that the market will stay this elevated both in terms of procedures as well as the healthy capital environment.
So it does depend on the market. And obviously, you know we outperformed the market, and you can -- depending on the year, it's 300 basis points or whatever that number is. But we're not going to defy gravity. If the market falls down to a certain level, then obviously, our growth would be similarly impacted. So I don't believe I was that precise with double-digit over 5 years. But I do feel bullish about the ability for us to continue to be a very high-growth business.

Operator

Our next question comes from Matt Miksic with Barclays.

Matthew Stephan Miksic

Congrats on a really strong quarter, which looks to me like and a lot of the feedback I'm getting is that it really is just all about comps. I mean double-digit organic growth against low teens -- low to mid-teens organic growth last year is -- that is at least impressive to us. So congrats on the continued momentum. I had one follow-up, if I could, on the Mako robot and maybe just the nature of the launch. If you could walk us through, is that you're expecting a limited launch and then sort of picking up momentum in 2025? And then, Kevin, if you could maybe talk about some of the either new aspects of that platform or some of the other products that you're kind of excited about in the next couple of quarters that they will start coming to market and adding to growth in the back half in '25. I appreciate it.

Kevin A. Lobo

Yes. Sure. Thanks. Jason, every quarter, we'll talk to you about new products. And we highlighted a couple this quarter with the LIFEPAK 35 and Pangea in our trauma business, both of which are really super exciting products that are going to contribute to growth for at least a few years to come. As it relates to Mako, so the new spine robot will be 2 parts. One part is the actual robot with a different attachment that will enable the pedicle screw guidance. The second part is the Q Guidance trade that's already being sold today. So that is used for first-line procedures. It's a very lightning fast camera. You saw it at NASS. It's being sold today to do navigated spine procedures. So those 2 components will make up the Mako Spine system.
And then in addition to that, the CoPilot product will be able to do diskectomies and bone preparation with haptic feedback to be able to protect you from getting close to vital structures, spinal cord, et cetera. So that -- and that, again, is going to be compatible with the Q camera in the same screen. So it's a comprehensive ecosystem that will be launched. And we're already seeding the market with 1/2 of the system with the Q Guidance, and then the second half is really whether you're doing makeover pedicle screw placement or using Q Guidance to do the bone preparation. So those are the 3 pieces of our enabling technology solution, part of which we're already selling today. So every time we're selling Q, which is contributing to our spine growth, it's part of the solution that will then be able to be used both with CoPilot as well as with Mako. So hopefully, that clarifies things for you.

Operator

Our next question comes from Danielle Antalffy with UBS.

Danielle Joy Antalffy

Congrats on a really strong start to the year. I guess, Glenn, this is probably a question for you on that 150 bps target for operating margin expansion. I mean just based -- I know it's early. You guys just [gave] this about 6 months ago. So not trying to be too greedy, but 80 bps year-over-year in Q1, it sounds like things are actually only getting better from here as it relates to super cycle of product. Inflation presumably starts to continue to ease, hopefully. So I guess just any comments you can make about that 150 bps target based on what you guys did here in Q1. And that's it for me.

Glenn S. Boehnlein

Okay. Yes. First, just so we're clear, the target is 200 basis points over the next 2 years, '24 and '25. And that's what we presented back at Analyst Day back in November. It's also the kind of the guidance we brought out in January. I think if you do the rough math, just based on our guidance, you'll see that we're in the realm of 100 basis points or 100 basis points plus in this first year. .
And you're correct, 80 basis points is a great start to the year. Seasonally, as we think about how this plays out for this year, we expect sort of second half margin expansion to be stronger than first half just given the seasonality of earnings that we see as the year plays out. No change in sort of our overall approach. If you think about what we did in 2023, you saw margin expansion coming through gross margin. 2024, we think and we expect that we'll see op expenses will lead more of the margin expansion. And then our goals in 2025 will likely be more balanced between gross margin and operating expenses.
There are lots of programs we have in place. I mean you've seen the results that we've had in price. We also have low-cost greenfield site, strategic in-sourcing. We'll continue to push shared services efficiencies, IT harmonization. And then honestly, if you just look at the natural leverage that we drive when we're growing at the high levels, that also is a piece of this equation. So we're excited about the Q1 performance. We will still continue to be working on it through the remainder of this year and into next year, and we'll update you quarterly as the earnings calls play forward.

Operator

Our next question comes from Matt Taylor with Jefferies.

Matthew Charles Taylor

I was hoping you could talk a little bit more about Pangea and LIFEPAK as 2 upcoming catalysts and maybe frame any acceleration or pickup we could see from those products. How material could they be?

Kevin A. Lobo

Yes. Well, I'd say -- if you look at our trauma business, core trauma, so excluding upper extremities and lower extremities, if you look at core trauma, we've been historically the leading nailing company in the marketplace. But we haven't been the leading plating company. Now we have some terrific places, whether it's our clavicle platters, our pelvic products. But we didn't have a comprehensive system of variable angle plating. This is an amazing product launch, very comprehensive and will really be a shot in the arm for plating, which, by the way, is more than half of the procedures in trauma are plating versus nailing.
And so we are wildly excited about this launch. We already have an incredibly high-performing core trauma business, fabulous leadership in our core trauma. And now we have a fabulous comprehensive plating solution. We've done roughly 40 cases so far. Feedback has been excellent from the surgeons. We -- it will take us time. We have to build out the sets, and these kind of launches take time to sort of fully roll out. But you're going to start to see the impact as early as Q3. We're going to have some procedures obviously done in Q2. It won't be too big of an impact, but it will start to have more of an impact in Q3, Q4 and beyond.
And as it relates to LIFEPAK, we are bringing in our sales force for a full sort of launch preparation in May, and we'll start to have our first shipments sometime in June. So there won't be much of an impact at all in Q2, but certainly going into Q3, Q4. We did show the product that a recent fire display conference -- firehouses, and the feedback was overwhelmingly positive. People were 7 and 8 rows deep looking at the product. It is -- we're really getting fantastic feedback.
And so we're building the product right now and getting ready for a launch. And these kind of launches, because of the price point, you're not going to see probably as big an impact this year as you would see -- you'll see some, obviously. Medical is already performing incredibly well. But you'll see some impact this year, but you're going to see a lot more in the next 2 to 3 years after that. These are long-cycle products. They last a long time, and we know how to replace capital equipment at Stryker, and we're going to be doing that. It's incredibly exciting. The last sort of big defibrillator that we launched was almost 20 years ago. So there is a huge replacement market for this modern and really fully featured product.

Operator

Our next question comes from Caitlin Cronin with Canaccord.

Caitlin Cronin

Congrats on the strong performance this quarter. Just turning to upper extremity, you noted strong performance there. Any changing dynamics with the CMS ruling and ASC's hospital patient earlier this year? And can we also get a refresher on the new products coming in your Shoulder portfolio and the timing of those?

Jason Beach

Caitlin, it's Jason. As we think about upper extremities, this continues to be a fast grower for us. As we think about kind of transition and the opportunity in the ASC, no change from that perspective. And we expect this will continue to be a fast-growing business for us.

Kevin A. Lobo

Yes. And as it relates to product launches, I think we talked about this on the last call, but we have about 5 products that are either going into full launch that we're in partial launch or are being launched. We have a perform fracture system, which is really exciting, a reverse stemless product. We have the pyrocarbon, which is hemiarthroplasty product. We have the hollow lens, which is -- you can visualize the surgery in the operating room. That was a limited launch last year. That's going to move to full launch. And I think it's the fifth one, Jason, the number?

Jason Beach

Those were the -- those were the big...

Kevin A. Lobo

Those are the main 4 ones. But there's a fifth one. I can't remember right now. But if you look -- go back to the last call, I think we did highlight all of those products. So this is a business that's been growing roughly 20% every single quarter. That continued. We have a very strong first quarter. And we expect that to continue not seeing any real change in the market dynamics at all where we have tremendous momentum, and we expect that momentum to continue.

Caitlin Cronin

Great. And then just a question (inaudible) given it's post close now what the strengths do you really see that bringing to your Hip portfolio going forward?

Kevin A. Lobo

Yes. Well, firstly, if you look at our business in Europe, it gives us tremendous market share in France. And the dual-mobility, they were the originators of dual-mobility, and they have a terrific portfolio of products not just for France, but certainly, they're well known throughout Europe. And then eventually even some of those products, we'll be looking to bring those to the United States. So it really gives us a shot in the arm in Europe where, as you know, we've historically had lower market shares than other parts of the world. So we're very excited about this product. The feedback so far from surgeons has been excellent. They're very differentiated products that are -- that have a lot of history behind them and are really well received in the marketplace.

Operator

Our next question comes from Richard Newitter with Truist.

Samuel E. Brodovsky

This is actually Sam on for Rich. I appreciate the commentary you guys gave earlier on margins being stronger or expansion being stronger in the second half. But just as we think about the 80 basis points of expansion this quarter, is that reasonable to think about as a floor on a quarterly basis this year? Or maybe should we think about a step back in 2Q?

Jason Beach

Sam, it's Jason. I'll take this one, and Glenn can pile on anything additional here. But again, to Glenn's comments, as you think about the margin expansion getting to 100 bps on a full year basis being second half weighted, it certainly would imply that you could have a quarter less than that from a margin expansion standpoint. Certainly, margin expansion in every quarter, but I wouldn't necessarily say it'd be to the levels of what you saw in Q1 every quarter.

Operator

Our next question comes from Joshua Jennings with TD Cowen.

Joshua Thomas Jennings

I was hoping to just dig into the 20 bps of pricing pressure experienced by the Orthopaedics and Spine units. Any chance you can help us think more -- provide more details on the pricing headwind experienced by the total joint franchise Knees and Hips? And then at AAOS, it seems like there's -- and still with your guidance that there's optimism that the macro device industry may be in a new kind of era of pricing. Any updated thoughts there? And then just one follow-up.

Glenn S. Boehnlein

Sure. I mean if you think about pricing, we do sort of -- there are sort of a tale of 2 cities. On the MedSurg side, we generally are able to gain pricing. There's certainly a premium placed on technology, and we work through contracts that provide bands of pricing that allow us to approach customers. On the ortho side, you're right. Traditionally, it's been a market that has had price declines.
I would say that as we think about our ortho business 5 years ago or even 6 years ago, we were looking at price declines that were in the 3% to 5% range. And I would say now what we're feeling and based on the contract sort of discipline that we have put in place with customers as well as sort of maybe a little bit of the impact of Mako being a closed system, we're feeling that we see sort of less negative price performance on the ortho side of our business. But we don't necessarily anticipate that ortho will ever get to positive, but we are feeling confident about less negative.

Joshua Thomas Jennings

And maybe just a follow-up. I was hoping you could share your outlook on the knee and hip markets. I think at AOS, our interpretation of some comments from your team and other orthopedic management teams was that we could see a higher level of growth in those markets relative to the pre-pandemic era. Just wanted to follow up. Any updated thoughts there? And also, there's been concerns about just the utilization headwind after a strong second half last year, broadly in the macro devices industry. And any thoughts on whether we should be thinking about a slowdown in utilization or procedure volumes in orthopedics in the second half here this year?

Jason Beach

Josh, it's Jason. I'll take this one. I'd say a couple of different things here. As we think about the market, our view has really not changed at all here. Even if you go back to Investor Day in November of last year, we said the ortho markets would grow, call that mid-single digit area. And we would outperform that 200 to 300 bps above that. So as we think about the full year this year, that's kind of how we're looking at the markets, and we feel as good as ever about that.

Operator

Our final question comes from Andrew Ranieri with Morgan Stanley.

Andrew Christopher Ranieri

Kevin, just 2 for you. Would you mind just talking about the trends you're seeing internationally in Mako? Any plans for geographic expansion in 2024? And really kind of like what utilization levels you're seeing with the Mako system outside the U.S.? And then second, just with the Gauss Surgical product, you touched on that. But can you also give us any more color on where you think you can take the product next within your MedSurg portfolio?

Kevin A. Lobo

Okay. Great. So firstly, on international, what we're seeing is kind of the same dynamic we saw in the U.S. about 5 or 6 years ago. We are installing a large number of robots, and those tend to be leading indicators. And as you install those, then they start to do the procedures, and you see growth in the implants. So there, where we were 5, 6 years ago, it's really picking up in India, Japan, for sure. Even parts of Europe are picking up.
We already had strength in the U.K., but we're picking up in other parts of Europe. China is still a bit small but starting to pick up as well. Korea is on fire for us with Mako. We're still a bit sluggish in Latin America. I'd say that's still a big opportunity for us, and there are hospitals that are demanding it. And we have to kind of -- we've made some changes in our own structure to really be able to address that opportunity.
But overall, it's target rich. It's later in the market cycle than it has been in the U.S. and in Australia. Even Canada is starting to really pick up, and that's a very new dynamic. They were very, very late to the Mako story. And so we're very excited not just with the number of installations. You've seen multiple quarters of international really humming on installations. But that is a gift that will keep on giving. We've seen this in every market where you have large installations. It is a precursor for significant high-growth quarter after quarter.
So very excited about the international opportunity. And it's still early days in many of these markets. So, so far so good. We're excited in the reception. Frankly, the most important thing is utilization. And so as we make sure these robots are being installed, are they being used at a high rate. And frankly, today, the country with the highest utilization for robot is India, the highest in the world. But it's picking up in other markets as well.
The second part of your question was on Gauss. So yes, we're really excited about Gauss. Obviously, this was an AI solution that we acquired to quantify hemoglobin for delivery as well as other general surgery procedures, and they had sort of a different kind of interface for the health care worker. We've improved that interface to make it a lot easier to use and combined that with our SurgiCount product -- I'm sorry, the, yes, SurgiCount, so the sponge counting. But this is also -- so measuring the blood in the sponge and the canister but also counting the sponges to make sure those sponges are left in the body.
There's ideas that we have about how we can connect to this tablet and have other devices tied to the tablet. It's a common tablet being used for both solutions. I'm not ready yet to talk about what that will be. There's a lot of other connectivity discussions going on inside Stryker, particularly with Vocera. At Vocera, obviously, we have the bed now connected to the Vocera badges in that system, and there are a lot of other discussions about what else can we connect with Vocera. It's just a little premature for us to talk to you about what those are. I think I'd rather have those products ready for launch and then talk about it.
But clearly, we are looking at workflow and bringing better IT solutions for our customers, really looking at that across the portfolio. How can we improve workflow in the hospitals? How can we reduce errors for hospital acquired conditions? Safety and outcomes is a big focus of many of our MedSurg divisions. And I think we're on a really good track. Did I ever think we'd buy an app on an iPhone, which is really what Gauss is? No. But that's the future. And that's going to be our focus. And Vocera, obviously, was a bigger foray into the digital solution world, but don't expect that this will be the end. And I can see within our deal pipeline, HIT is going to feature and don't be surprised if we continue to do both organic innovation as well as acquisitions to bolster our presence within HIT.

Operator

There are no further questions. I will now turn the call over to Kevin Lobo for closing remarks.

Kevin A. Lobo

Thank you for joining our call. As you can see, 2024 is shaping up to be another strong year for Stryker. We look forward to sharing our Q2 results with you in July. Thank you.