Stryker Corp

NYSE:SYK

Q1-2025 Earnings Call

[Operator]

Welcome to the First Quarter 2025 Stryker Earnings Call. My name is Luke, and I'll be your operator for today's call. [Operator Instructions] This conference call is being recorded for replay purposes.

Before we begin, I'd 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's an exhibit to Stryker's current report on Form 8-K filed today with the SEC.

I'd now like to turn the call over to Mr. Kevin Lobo, Chair and Chief Executive Officer. You may proceed, sir.

[Kevin Lobo, executive]

Welcome to Stryker's first quarter earnings call. Joining me today are Preston Wells, Stryker's CFO; and Jason Beach, Vice President of Finance and Investor Relations. For today's call, I'll provide opening comments, followed by Jason with the trends we saw during the quarter and some product updates. Preston will then provide additional details regarding our quarterly results, before opening the call to Q&A.

In the first quarter, we delivered robust organic sales growth of 10.1%, with double-digit growth in MedSurg and Neurotechnology and high single-digit growth in Orthopaedics, despite one less selling day and a 10% comparable from a year ago. This performance reflects the sustained demand across our product portfolio and our team's vigorous commercial execution. Our results were led by a very strong U.S. performance, including double-digit organic growth from our Trauma and Extremities, Neuro Cranial, Medical, Endoscopy and Instruments businesses, and strong high single-digit organic growth in our Hips and Knees businesses.

Internationally, we had healthy growth across a broad range of markets, with notable strength in Australia and New Zealand, Japan and Europe. We continue to see international markets as a significant catalyst for future growth.

We delivered quarterly adjusted EPS of $2.84 a share, reflecting 13.6% growth compared to the first quarter of 2024, driven by our strong sales performance and margin expansion.

On the M&A front, we completed the acquisition of Inari Medical at the end of February. Integration is going well, and we're excited to have Inari as part of Stryker. Additionally, we have completed the sale of our U.S. Spinal Implants business. We're grateful to our former Spine team members for their contributions and wish them continued success.

We have momentum exiting Q1 and now anticipate full year organic sales growth of 8.5% to 9.5% and adjusted earnings per share of $13.20 to $13.45. 2025 will mark the fourth consecutive year that we will hover around double-digit organic sales growth, following 9.7% in 2022, 11.5% in 2023 and 10.2% in 2024. The durability of our high growth is as a result of our commercial execution, extensive innovation pipelines across the company. Our guidance also implies that our operating margin expansion will be approximately 100 basis points despite the negative impact of tariffs, dilution from Inari and the loss of Spinal Implant contributions for 9 months.

Finally, I'd like to express gratitude to our teams for their unwavering dedication to our culture, exemplified by Stryker being recognized for the 15th consecutive year on Great Place to Work's 100 Best Companies to Work For list. Our operating model, exceptional talent and differentiated culture continue to set us apart.

I will now turn the call over to Jason.

[Jason Beach, executive]

Thanks, Kevin. My comments today will focus on providing an update on the current environment, capital demand and select product highlights.

Procedural volumes remained healthy in the first quarter, underscored by continued adoption of robotic-assisted surgery. We also continue to benefit from a stable pricing environment, favorable demographic trends and the ongoing shift toward ASCs. We expect the strength in procedural demand to continue through the remainder of the year.

Demand for our capital products was strong once again in the quarter, with an elevated order book across our capital businesses. Mako continues to drive patient and customer interest, highlighted by our best-ever Q1 for installations in the U.S. and worldwide, with high utilization rates across the globe. We expect the sustained momentum from installations and utilizations will continue to drive growth in our Hips and Knees businesses.

We continue to receive positive feedback on Mako Spine and Shoulder, and remain on track for full U.S. commercial launch of Mako Spine in the second half of this year and Mako Shoulder in the first quarter of 2026. We recently launched our next-generation Mako 4 SmartRobotics system. It features a larger monitor for improved visibility, a smaller OR footprint for fast setup and transport and integrates more seamlessly with our fourth-generation Q Guidance System. We remain excited about the momentum Mako provides for our business.

In addition to being a leader in robotics and orthopedics, we are also the leader in cementless knees, which continue to grow at a steady pace. During Q1, there are 2 publications showing 10-year survivorship exceeding 99% for our cementless offering.

Next, our latest platform launches continue to thrive in the marketplace. Our LIFEPAK 35 defibrillator and monitor continues to experience robust demand, fueling a strong order book and driving meaningful sales in the quarter. We are excited about the international opportunities that remain for LIFEPAK 35 and anticipate launching in additional international markets later this year, including Europe and Japan.

Our Pangea plating system also continues to drive strong growth and increased awareness of our comprehensive offering of trauma products. We continue to progress through our launch cadence and expect to release Pangea in Australia and Canada this year and in Japan in the first half of 2026.

Lastly, as Kevin mentioned in his remarks, we completed the acquisition of Inari during the quarter. Inari's performance to date was strong as we expected, and its results are reported within our vascular division that includes both the Neurovascular and peripheral vascular businesses. In addition to Inari, our prior year acquisitions performed well as anticipated.

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

[Preston Wells, executive]

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 10.1% in the quarter compared to 10% in the first quarter of 2024. This quarter had one fewer selling day than 2024. We had a 0.7% favorable impact from pricing with both our MedSurg and Neurotechnology and Orthopaedics segment seeing positive trends from our pricing initiatives. Foreign currency had a 0.9% unfavorable impact on sales. Geographically, U.S. organic sales growth was 10.7% and International organic sales growth was 8.5%, with strong sales momentum in Australia, New Zealand, Japan and Europe. Our adjusted EPS of $2.84 was up 13.6% from 2024, driven by our strong sales growth, higher gross margins and operating margin expansion. Foreign currency translation had an unfavorable impact of $0.03.

Now I will provide some highlights around our quarterly segment performance. In the quarter, MedSurg and Neurotechnology had organic sales growth of 10.7%, which included 11.4% of U.S. organic growth and 8.2% of International organic growth.

Instruments had U.S. organic sales growth of 10.4%, led by a robust double-digit performance in the Surgical Technologies business. Endoscopy had U.S. organic sales growth of 11.1%, led by double-digit performances in our core Endoscopy and Sports Medicine portfolios. Medical had U.S. organic sales growth of 12.6%, driven by double-digit performances in the emergency care and Sage businesses. As it nears the 1-year anniversary of its U.S. launch, LIFEPAK 35 continues to drive considerable excitement in the market with a strong pipeline.

Vascular had U.S. organic sales growth of 5.6%, reflecting solid performance in our hemorrhagic products. And as a reminder, organic sales do not include Inari. And finally, Neuro Cranial had U.S. organic sales growth of 13%, led by strong double-digit growth in our Neurosurgical, ENT and Craniomaxillofacial businesses. Internationally, MedSurg and Neurotechnology's organic sales growth of 8.2% despite some supply disruptions affecting our Medical business that continued this quarter and will linger through Q2. Growth was led by our Neuro Cranial, Endoscopy and Instruments businesses. Geographically, this included strong performances in Australia, New Zealand, Europe and most of our emerging markets.

Orthopaedics had organic sales growth of 9.3%, which included organic growth of 9.5% in the U.S. and 8.8% internationally. Our U.S. Knee business grew 8.3% organically, fueled by our market-leading position of robotic-assisted knee procedures and continued momentum from new Mako installations. Our U.S. Hip business grew 7.6% organically, reflecting the ongoing success of our Insignia Hip Stem and the continued adoption of our Mako robotic hip platform.

Our U.S. Trauma and Extremities businesses grew 15.2% organically, with very strong double-digit sales growth in our core trauma and upper extremities businesses. Our core trauma performance was led by Pangea, our differentiated plating portfolio, which continues to maintain robust interest and adoption in the market. The U.S. Spinal Implants business was flat organically in the quarter. The U.S. Other Ortho business declined 1.9% organically against a very strong comparable of 28% in the same quarter last year. This quarter's organic change was primarily driven by Mako deal mix away from direct purchases and a decline in bone cement. Internationally, Orthopaedics growth of 8.8% organically included strong performances in Japan, Europe, South Korea, Canada and many of our emerging markets.

Now I will focus on certain operating and nonoperating highlights in the first quarter. Our adjusted gross margin of 65.5% was favorable by 190 basis points compared to the first quarter of 2024. This improvement was primarily driven by manufacturing cost improvements, positive pricing and business mix. Our adjusted operating margin was 22.9% of sales, which was 100 basis points favorable to the first quarter of 2024, driven by the gross margin favorability I just discussed, somewhat offset by higher SG&A spending. The increase in SG&A spending versus the same quarter last year was driven by the Inari deal and other investments to support our growth.

Adjusted other income and expense of $73 million for the quarter was $24 million higher than 2024, driven by higher interest expense related to our September 2024 and January 2025 debt issuances, partially offset by interest income from higher levels of invested cash. For 2025, we expect our full year adjusted other income and expense to be approximately $430 million. As a reminder, our previous guidance of approximately $260 million excluded the impact of Inari. We utilized cash on hand and incurred additional debt to fund the acquisition, and our updated guidance reflects additional interest expense from net debt as well as reduced interest income from lower levels of invested cash on hand. The first quarter had an adjusted effective tax rate of 13.7%, reflecting the impact of geographic mix and certain discrete tax items. For 2025, we continue to expect our full year effective tax rate to be in the range of 15% to 16%.

Turning to cash flow. Our year-to-date cash from operations was $250 million, reflecting the results of net earnings, normal first quarter seasonal cash outflows and onetime costs associated with the Inari deal.

And now I will discuss our full year 2025 guidance. Considering our first quarter results, strong demand for our capital products and our commercial momentum in the end markets in which we operate, we are raising our organic net sales growth guidance and now expect sales growth of 8.5% to 9.5%. Our updated sales guidance reflects a modestly favorable pricing impact and a slightly unfavorable foreign exchange impact should rates hold near current levels. As a reminder, our previous adjusted EPS guidance was $13.45 to $13.70, excluding $0.20 to $0.30 of dilution from the Inari acquisition. We are reiterating that guidance and now expect our adjusted EPS to be in the range of $13.20 to $13.45. This guidance includes the net impact of tariffs and our offsetting mitigation efforts. We are currently estimating a tariff impact of approximately $200 million in 2025 based on what has been announced and what is in effect today, including the 10% baseline, product-specific and geographic-specific tariffs.

We are taking thoughtful measures to address the estimated impact, and we expect to offset tariff costs through our continued sales momentum, the leveraging of our manufacturing footprint, disciplined spending and better-than-expected foreign currency impacts. We now expect a negative foreign exchange impact in the range of $0 to $0.10 should rates hold near current levels. And finally, beginning in Q2, our operating results will no longer include the results of the international Spinal Implants business as those results are now attributable to VB Spine as part of the sale agreement.

And with that, I will now open the call for Q&A.

[Operator]

[Operator Instructions]

Our first question will come from Marcus Robert (sic) [ Robert Marcus ] with JPMorgan.

[Robert Marcus, analyst]

Congrats on a really nice quarter. I'm sure this was a really fun few weeks for you, Preston, with all that's going on. And maybe we could start there on tariffs. You're absorbing the entire impact, $200 million. How should we think about where that absorption is coming from? What's your ability to mitigate as much as possible? And how should we think about the exit rate into next year versus those mitigation efforts?

[Preston Wells, executive]

Yes. So Robbie, just to get after that. So as you said, $200 million is what we're currently estimating. And just to just talk through that piece for a second, that's based on what's currently in effect today. So what it does not include, it does not include anything that was paused for the 90 days. So it's all the items that we know about today. Given the dynamic environment, that's where we feel comfortable in terms of where our projections are going to be.

And in terms of how we're planning on offsetting that, obviously, we have great sales momentum that's continuing on the top line. So the raise that we talked about in our guidance will be a part of that. Price will be a part of that as we think about how we're going after that top line growth. We also know that we're looking at some different discretionary factors in terms of our spend and how we're looking at areas there. And then also as we think about our supply chain and really just making sure that we're optimizing our supply chain to the best of our ability to minimize the impact in the short term from a tariff standpoint. And then we also have positive FX momentum that's also helping us as we think about where we are today.

So in terms of the geography of where that's going to hit, obviously, the tariffs will occur in our standard cost line, so our cost of goods sold area. And then a lot of the mitigations will happen really in OpEx as well as throughout the P&L when we're talking about delivering on the top line.

[Robert Marcus, analyst]

Great. Maybe a quick follow-up, Orthopaedics. That had been running a little bit more in line with estimates the past few quarters. You had a great beat here. We've seen 3 of the 4 main competitors report. I would say, 2 of those, including you, have been really good results, one a little less so. What are you seeing in terms of the ortho market, the sustainability of the growth and just the current environment here and your positioning?

[Kevin Lobo, executive]

The ortho market, as we said at AAOS and as we said at the end of last year, continues to be healthy. Demand is strong. Surgeons still have significant backlogs, and we've been pretty consistent in stating that we expect the market to grow in the 4% or 5% range, and then we expect to grow above that since we have been share takers for quite some time. We continue to have tremendous momentum with Mako, with cementless knees. Our Hip business obviously continues to grow very, very well. So we are very pleased with our performance. We have a great leadership team running our joint replacement business. And of course, you saw the Trauma and Extremities numbers were outstanding, and that should continue throughout the year.

[Operator]

Our next question comes from the line of Larry Biegelsen with Wells Fargo.

[Larry Biegelsen, analyst]

I'll echo my congratulations on a really impressive quarter here. 10% organic growth in Q1, Kevin, with one less selling day, so closer to 11% underlying. The guidance of 8.5% to 9% -- 8.5% to 9.5%, I'm sorry, or 9% at the midpoint implies slightly slower growth Q2 through Q4. So just talk about the environment beyond Orthopaedics that you addressed in the last question and your momentum. Is there anything you're seeing that concerns you? And I have one follow-up.

[Kevin Lobo, executive]

This is kind of the same place that we were at last year at this time, if you remember, and we made our raise. And do I think we could finish higher than the range? It's possible. It's just early in the year right now. There are no big red flags that I'm worried about from the top line standpoint.

We did mention in our prepared remarks that Medical is having some supply chain disruptions. That will continue through Q2, but that is factored in our guidance. And the rest of the businesses are really in terrific shape, launching new products, getting new approvals in outside markets. And so we feel very good about the top line. And is it possible we could do another 10%? Sure, that is possible.

[Larry Biegelsen, analyst]

Okay. That's super helpful. And Preston, the gross margin was really strong this quarter. Talk about how to think about the rest of the year for the gross and operating margin because I assume the tariffs are going to hit the gross margin probably third and fourth quarter. Any color you can help provide on just kind of the cadence of margins to help reach that operating margin year-over-year of 100 basis point improvement that Kevin talked about would be helpful.

[Preston Wells, executive]

Yes, Larry, you mentioned it. I mean our focus really is on that 100 basis points of op margin improvement. And in the past, what we've said is it's going to be a bit of a balance in terms of where that comes from, both from the gross margin as well as in OpEx. And that continues. And our expectation is that's going to continue.

As you know, there's a lot going on in these various lines. We have some positive impact in our gross margin as a result of some of the efforts and activities that we've been taking on as well as the business mix, which is being driven by Inari. As we go through the rest of the year, we're going to have some offsetting negatives in that, which will come from tariffs.

So really, as we think about it, we're still focused on driving the 100 basis points at the bottom. That will come from both gross margin and from OpEx through the different initiatives that we have. Slightly different than maybe what we thought at the beginning of the year with now tariffs and Inari, but all the same, still driving to the 100 basis points.

[Operator]

Our next question comes from the line of Joanne Wuensch with Citi.

[Joanne Wuensch, analyst]

Very nice quarter. I'll put both of mine upfront. CapEx environment is a question we've been asking most management teams throughout the season, both in the U.S. and outside the United States. I'd love to see what you're thinking about that. And then also with Inari closed now, I think, for 2 months, what are you seeing with that? Is it going according to plan? Any surprises, positive or negative you can share?

[Jason Beach, executive]

Joanne, it's Jason. I'll start with the CapEx side here, and then I'll hand it over to Kevin to talk a little bit about Inari. But just if you think about the performance in our capital businesses in the first quarter, double-digit growth kind of across the board there, we continue to see really nice growth in our capital businesses. There's really nothing in the environment today that would give us any indication of a slowdown, and we feel good about the business as we move throughout this year as well.

[Kevin Lobo, executive]

And related to Inari, I would say we're very pleased with the early integration. We had it for about 8 or 9 days in the month of February and then the full month of March. And so far, so good. We had a terrific performance on the top line. The culture is very consistent with Stryker's culture.

Tim Lanier, who was running our Trauma and Extremities business, is now running the Inari business as the President of Inari. And he had prior experience in the peripheral vascular space back from his ev3 days. And he's digging in, and we're really excited about what he's seeing from the commercial organization as well as from our R&D pipeline at Inari. So, so far, so good is how I characterize it. We look forward to their continuing contributions to Stryker.

[Operator]

Our next question comes from the line of Ryan Zimmerman with BTIG.

[Ryan Zimmerman, analyst]

And let me echo that congrats on a strong quarter. I want to ask about the OUS Hip number. It was pretty good, to say the least, and it stands out amongst the broader market. I'm kind of wondering what we should think about the durability of that segment given how well it's going outside the U.S. for the past really 4 quarters now.

[Kevin Lobo, executive]

Just to be clear though, we are benefiting from the SERF acquisition. If you look at our growth, that's nonorganic. So there was a nonorganic component. But even that said, the organic growth internationally has been very strong in our Hip business. And this is without the benefits of Insignia. So the Insignia stem in Europe is still not launched. It's just getting launched in some of the Asia Pacific markets. And so I think good times are still ahead of us within the Hip business internationally, but we did pick up some benefit from the SERF acquisition. And actually, we've got now launched a couple of their products now in the United States as well. So that will be contributing. It will no longer be inorganic starting in the second quarter of this year. So next quarter, you'll see it all on a more organic basis.

[Ryan Zimmerman, analyst]

Okay. Very helpful, Kevin. And then turning to Trauma and Extremities, I'm wondering if you could unpack that a little bit because that has also been strong. I mean you have the Pangea plating system. But is there anything in there, particularly in the extremities line, that we should think about in terms of the momentum you're seeing in that segment?

[Kevin Lobo, executive]

Sure. It starts with Pangea. I mean Pangea has been just a wild success is how I'd characterize it. Really a fantastic launch so far. And again, not yet approved in many international markets, but in the U.S. has been absolutely on fire. Surgeons love it. It's performing extremely well. That's lifting the core trauma business.

And then upper extremities continues to be a fantastic grower for us, has been since we acquired Wright, quarter after quarter after quarter after quarter of strong double-digit growth. That was the same again in Q1 of this year. So those are the 2 engines that are really powering the Trauma and Extremities businesses. So we're very bullish on this division for the rest of this year.

[Operator]

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

[Travis Steed, analyst]

Congrats on the good quarter. Just one more tariff follow-up question. A couple of things I was going to ask. On the $200 million, curious how much of that's being offset by currency? Any details on kind of how much of that exposure is by country? What the impact would be if the 90-day pause doesn't stick and kind of goes back to the higher rates? And how to think about 2026? It's good to annualize that, or if you've got extra offsets in 2026 that you think you can pull? And I know I was going to ask about exemptions, too. I know you guys have a lot of close relationships with AdvaMed. So curious how those discussions are going for any exemptions for medical devices.

[Preston Wells, executive]

Travis, that was a lot of questions in one. No. So just to answer the tariff piece first, and then we can talk a little about AdvaMed. But in terms of the tariff itself, so as we said, $200 million is based on what we know today. And I think given the environment that we're in, it's really difficult to try to extrapolate out what that may mean kind of even beyond this year, just knowing that there's a lot of things that could still happen and likely will still happen. So we're not going to speculate on what it's going to look like next year for sure as we still try to just make sure we've got this year under control.

So in terms of the tariff cost, really, the number we're focused on is $200 million for this year. The one element that I would say is there is a piece of this year's cost, but because it's going into our standards, that will be held on the balance sheet and then amortized through as we sell product into next year. So that -- just as we think about what the full impact is, that just gives you some information there.

In terms of AdvaMed, I know there's a lot of those conversations that are going on. As of right now, there really is no blanket exemption for med device. There's discussions that will continue to happen. And just like anything else, because of the dynamic environment that it is, anything can happen in terms of exemptions into the future. We're planning right now on what we know, and the mitigation factors that we have in place are based on that, and that's what we're going to really be focused on for the short term and until things change.

[Operator]

Our next question comes from the line of Vijay Kumar with Evercore ISI.

[Vijay Kumar, analyst]

Congrats on a [ nice spring ] here. Maybe just on the prior question on tariff here. If you could just comment on cadence of margins, how should we think about progression? And I'm assuming tariff is mostly a back half impact. That $200 million, is this China versus Europe? Or what proportion is China versus ex China would be helpful?

[Preston Wells, executive]

Yes, Vijay. So thinking about the progression of our margin expansion, we're really pleased with the progress that we've made in terms of the programs and activities that we have in place, and really expect a more even flow of our margin improvement throughout the rest of this year as we think about getting to the 100 basis points for the full year.

When you think about tariffs, you're right, tariffs are going to be more back-half loaded, just given the nature of going into inventory and then just the timing of where we are in the year. Offsetting that though, we're going to have our mitigation factors that we're working on. And what we hope to happen is to offset those almost in a one-to-one fashion as it comes through the back half of the year. So again, our expectation is that we have a much more consistent flow from a margin standpoint on the bottom line as we think about the rest of this year to get to the 100 basis points.

In terms of the percentages of where tariffs are coming from and things of that nature, we're not going to get into all of those details. But you can certainly look at where the percentages of our business are. And as we said, we're about 2% of our business is in China.

[Vijay Kumar, analyst]

Understood. And Kevin, maybe one for you on the Medical side. Any comments on how LP 35 launch is going? I think in the past, you've commented about share gains. Curious on share gain opportunity that you're seeing within Medical.

[Kevin Lobo, executive]

Yes. So far, the launch is going very well. It's being very well received. The orders are picking up at a healthy rate. And again, we're pending approvals in many other international markets, and we're excited about that. I think that was mentioned in Jason's opening remarks.

But we have a winner of a product just like Pangea. It's going to take some time. Obviously, they're high purchase price. It needs a little bit of time to trial and customers to make sure they have that in their budgets. But so far, it's off to a very good start. It was a strong contributor to our growth in the first quarter because we did have supply chain challenges. And it showed up more in the print internationally, but it actually did affect some of our U.S. business also, but it was offset by the strength of Pangea to deliver those double-digit growth. So, so far, so good on the Pangea launch and expect it will continue to be a big contributor. Keep in mind, we have over about 100,000 of these prior generation defibrillators out there in the marketplace. So it's going to be a tailwind that'll last many, many years into the future.

[Operator]

Our next question comes from the line of David Roman with Goldman Sachs.

[David Roman, analyst]

I was hoping to spend a little bit more time on the pricing environment. Obviously, that was something that coming into the year, you had contemplated not realizing the same level of benefits that you accrued in 2024. Can you just talk to us about what has evolved over the course of the year? And just to clarify, this is pure price, not the impact of new product momentum?

[Preston Wells, executive]

Yes, David, absolutely. So as we think about where price has evolved for us over the last several years, it's a muscle that we have really begun to learn how to use and exercise. You saw that in our results at the end of last year. We see a really positive impact in terms of our pricing results during the first quarter, and certainly something that we'll continue to focus on as we go forward. And we are seeing positive price coming out of our MedSurg and Neurotechnology businesses. But even on the ortho side, we're seeing less negative price there.

And so I would say, ultimately, it's an area that we'll continue to focus on. And certainly, in this environment that continue to be dynamic with tariffs, will be one of the levers that we're looking at pulling in terms of offsetting some of the tariff impact.

[David Roman, analyst]

Okay. And then maybe just on Pangea, it sounds like you're moving relatively quickly towards full market release. I think at AAOS, you talked about having inventory available to some subsegment of the sales force. On this call, you're introducing geographic expansion. It sounds like you're getting very close to fully hitting an inflection on that rollout. How should we think about kind of maybe what transpired here in the past 1.5 months or so since AAOS and where you are in that U.S. and OUS rollout?

[Jason Beach, executive]

Yes, David, it's Jason. Similar to what I said in my prepared remarks, I mean, we're seeing, obviously, very good momentum with Pangea and a material impact to the Trauma and Extremities results in Q1. As you think about just kind of the launch cadence, we do expect to release Pangea in Australia and Canada later this year, Japan in the first half of 2026. So I would say it's continuing to ramp and will be a material contributor to that division as we move forward.

[Kevin Lobo, executive]

Yes. And in the U.S., we still haven't fully launched. So we're continuing to roll out sets. We're getting close to it being fully launched, but that's the base Pangea system. We still also have MIS. We have additional plates that are still going to be launched over the course of this year. So it's not something that will just stop. It will be kind of on continuous launch mode for the next couple of years. But the big bolus of sets are out in the field now and have been contributing to our growth in the United States.

[Operator]

Our next question will come from Philip Chickering with Deutsche Bank.

[Pito Chickering, analyst]

Another sort of tariff question here. Looking at the inventory days, you guys run about 7 months. So just looking at the timing of the tariffs, would the tariffs be fully impacting your run rate by the fourth quarter? Or will we not see that until the first quarter of '26?

[Preston Wells, executive]

Yes, good question. So it will vary. So while we look at the overall impact of about 7 months in terms of our carrying days, it really varies by business. And so as we think about tariffs, the way the tariffs are going to be impacting, it really varies across our different lines of business in terms of where items are sourced, how they're sourced, where we have opportunities for dual sourcing. So it's not going to be that clean in terms of just looking at it versus that.

So I think you should see the largest in terms of the run rate impact likely will be what we see at the end of the second -- at the end of the year will be likely the run rate that we have based on what we know today. So I just want to make sure that we're clear on that. Based on what's in place today, as we get to the second half of the year here and really the fourth quarter, that should be a pretty good indication of where tariffs are running based on what the rate -- based on what the tariffs are in place right now.

[Pito Chickering, analyst]

Okay. Great. And then looking at the other ortho category, it looked to be flat year-over-year on the revenue side. We talked about record Mako placements. Is this more reflective of customers switching to leases versus purchases? And any read-through there on how hospitals are viewing CapEx purchases today versus buying if they're any more cautious on the CapEx environment?

[Preston Wells, executive]

Yes. Yes. We've been seeing this trend happening really over the last year plus as we continue to roll out Mako. And now, obviously, with Mako 4 introduces another system into our portfolio as we transition folks.

So I don't think it's an indication really of what the overall capital environment is. I think it's more an indication of how people are buying robots today and how they're then transitioning those. A lot of times when we see people taking on rentals in particular, those rentals do end up turning into direct sales over time. So again, I think it's just a trend that we've seen in the past and just continue to see in the first quarter.

[Operator]

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

[Phillip Dantoin, analyst]

This is Phil on for Matt. Congrats on the great start to the year. For starters, I wanted to hear your updated thoughts on M&A in this post-Spine Implant unit sale. I mean you're below 3x, but might we still see a period of debt digestion or more further -- or I guess, further tuck-in deals? I know in the past, you've highlighted things like soft tissue robotics, neuromod, but curious to hear your updated thoughts.

[Preston Wells, executive]

Yes. Just in terms of our overall ability of where we are, I mean, we're in a very good position from a liquidity standpoint, and certainly still have the ability to go out and tap the debt markets if necessary and the right deal comes through. So we're just continuing to manage in terms of our overall credit ratings and in terms of investment grade, and we'll just focus on what opportunities are available and then go out and make sure we have the right funding to support those opportunities.

I'll turn it over to Kevin to talk more about the specific markets.

[Kevin Lobo, executive]

Yes. So our first priority always is the existing businesses that we have. If they have tuck-ins that will fit their business regardless of size, small, medium or larger tuck-ins, that's always a priority because those deals, we know, are going to be successfully integrated and drive tremendous value. That's been our formula. So that's in play. There are -- our BD teams are actively working with targets and identifying the ones that they would like to pursue. So that offense has never stopped, and it's not stopping even after doing Inari because we do have sufficient bandwidth right now to be able to go to the debt markets if we need to and be able to acquire other companies.

There are other adjacencies, which as you know, peripheral was one of the ones I talked about for many years, and we finally pulled the trigger on that one. Those other ones you mentioned are among the list of adjacencies that we continue to pursue, but they're not prioritized ahead of our tuck-ins. So tuck-ins will continue to be the vast majority in terms of number of deals we do. And then, of course, those other ones, should a good deal materialize, we will definitely activate on that.

[Phillip Dantoin, analyst]

That's helpful. And then one final one on the Spine divestiture and your thoughts on Mako Spine still launching in the second half of this year. But just the relationship between Mako Spine and VB Spine, how innovation might work going forward and how you view the separation of the robot and the implants themselves.

[Kevin Lobo, executive]

We will continue to work with VB Spine. They have an exclusive arrangement with us on Mako Spine on the robot. And so we will contract with them. It will be a little more complicated because you now have 2 different companies versus 1 company. But 2 different divisions of Stryker can sometimes be complicated as well as we've seen in the past. But we're excited to work with them and do deals with them together. And we will obviously get the revenue for the Mako sales that we make, and they will get the revenue from their implants. But it is a partnership, and we're going to continue to work together, and we're excited about it.

We also have the Copilot product that's out of our Neurosurgery business, which surgeons are very excited about, that also operates within the same ecosystem with the Q Guidance camera card, which is part of the Mako system as well.

So it is a comprehensive offering, and we're excited to be selling the capital portions of that and VB Spine will sell the implants. But so far, so good. Our teams are working together very well. And in fact, it is the same sales force that we had within Stryker that has now transferred over to VB. So we know each other, and we'll continue to work well together.

[Operator]

Our next question comes from the line of Richard Newitter with Truist.

[Ravi Misra, analyst]

This is Ravi here for Rich. I just want to go back on to the kind of CapEx commentary that you were mentioning earlier. I appreciate that you have a strong kind of outlook into the rest of 2025. But how are some of the early conversations about 2026 shaping up, particularly in the C-suite of hospitals? Any nervousness that you're sensing on that part?

And I'll just ask the second one upfront. With Inari now in-house, can you maybe talk a little bit about R&D priorities and what you might be seeing? Anything from PEERLESS one?

[Jason Beach, executive]

Yes, this is Jason. I'll start here and talk a little bit about the CapEx, and I'll turn it back over to Kevin to talk about Inari. But I would say a couple of different things, right? We're just exiting the first quarter here, so any 2026 conversation would be pretty early at this point.

But the other thing that I would add is just if you go back and you think about our mix of capital and how that plays out for us, we have about 10% of our capital that's kind of this larger capital, so think booms, lights, beds, those kinds of things. And then 15%-ish of our revenue is the smaller capital that's very closely tied to procedures. So camera, heavy-duty power, those types of things. And so as long as procedures stay strong, we've got all the reason to believe that there will be a need for that type of capital. Keeping in mind, it goes through sterilization, it gets beat up, it needs to be replaced. So we feel good about that for the remainder of 2025 and then even as we think about early 2026.

[Kevin Lobo, executive]

Yes. As it relates Inari, they already have the FlowTriever, the ClotTriever and LimFlow. Those 3 products are doing very well. We're excited about those. And there are, let's say, improvements that are in the works in the R&D organization. But I can't get into that right now as we normally don't talk about products that are in the R&D pipeline, but we do have improvements to those.

And then we have Artix, which was just recently launched, which is in our first arterial product, which so far is getting very favorable response from customers, and that will start to become a contributor to our growth in the future quarters. So we're excited about having Inari within our portfolio. And they have a very strong management team, and we're looking forward to a really bright future.

[Operator]

Our next question comes from the line of Chris Pasquale with Nephron Research.

[Carol Wong, analyst]

This is Carol calling in for Chris. I know we've talked at length about the short-term lever to offset some of the tariff impacts. I'm kind of curious if you can talk about any steps that you're taking to mitigate your potential exposure in 2026. And specifically on the manufacturing footprint, you talked a little bit about expanding your manufacturing footprint internationally as a lever for margin expansion. So I'm kind of curious to hear that strategy has changed at all given these recent developments.

[Preston Wells, executive]

Yes. Thanks for the question. So as I said before, we're really not speculating at this point on 2026, just given how dynamic and how quickly this has all changed and continues to change.

With respect to how we're thinking about manufacturing as well, at this point, nothing's changed also. Just as a reminder, in our industry, of course, it's very difficult to move manufacturing, and it takes a long time to do so. So we want to be very careful about how we're approaching anything like that. And at this point, we have no plans that have changed in terms of how we're expanding.

We're thinking about our footprint. We are trying to leverage though, where we can, some opportunities in terms of dual sourcing where we have opportunities to produce certain products in certain regions just depending on where the tariffs are coming from in terms of mitigating those. But from a long-term standpoint, at this point, we are not looking at any major changes to our manufacturing footprint.

[Carol Wong, analyst]

Great. And I guess from an industry perspective, taking everything aside, kind of curious to get your thoughts on the FDA layoff that happened recently. Do you think the disruption there could be an issue of getting new products getting approved?

[Kevin Lobo, executive]

The initial reductions of the FDA have largely been replaced. So we pay for the FDA resources through user fees, the MDUFA, as you heard 3, 4 or 5 that we've negotiated. A lot of that talent is paid for by industry. And when those people were released, we, through the trade association called the government and said, "Listen, these are people that we're funding through our user fees." They were -- those jobs were largely reinstated. And so there was a slight disruption, but it was literally a week or 2, and those people were brought back on staff.

So we're not seeing any major slowdowns. I don't anticipate any major slowdowns. If those had stayed into effect, that probably would have had an issue or an impact. But for now, as far as we know, those resources were largely restored and things are back on a good footing.

[Operator]

Our next question comes from the line of Matthew Miksic with Barclays.

[Matthew Miksic, analyst]

Kevin, apologies, we're all juggling a number of calls right now. But wondering if you could talk a little bit about any of the conversations you're having with hospitals about budgets, if that's an issue, or if it started to come up or how you're thinking about that?

And then also just a comment on shoulders. I know you mentioned the shoulder robot early in the call, but just maybe what is driving your growth there? What has been? Just kind of walk us through, where has the strength been? How do you expect that to continue as you kind of move through the interim launch?

[Jason Beach, executive]

Yes, Matt, I'll take the first part of that, and I'll turn it over to Kevin to touch on Shoulder and how we feel about that. But as it relates to conversations with hospitals and the CapEx environment, hospitals are doing well, right? And so that environment for us is very positive. I mentioned at the beginning of the call as well, if you look at our capital businesses, we grew double digit, both in the U.S. and on a worldwide basis. So things going well there and no signs of slowdown from that standpoint.

[Kevin Lobo, executive]

Yes. As it relates to Shoulder, this is not a new story. We've had this tremendous growth in Shoulders. It was happening prior to us acquiring Wright Medical, and it has continued post acquisition.

We have some really amazing, call it, newer products. So the Perform system is a very modern shoulder system. We added the fracture stem, reverse stemless in the past, sort of, let's call it, 18 months to 2 years. We have Shoulder iD, which is a patient-specific glenoid, which is amazing to be able to put into -- that's the most difficult part of the procedure, to not to have to use Augments to be able to just stick that implant, and that's perfectly designed to match the patient's anatomy. And then we have pyrocarbon, which is a very new, very novel hemiarthroplasty product for shoulders that has been on the market outside the U.S. for about a decade and has got approval in the United States about a year ago.

So that's all creating very much a lot of continued excitement around our Shoulder business with a terrific management team that knows how to execute. We are the leader in shoulder arthroplasty, and we're continuing to drive very high growth through a very, very successful product portfolio and the Blueprint software, which uses AI to actually help the surgeon know which implant to put in for the patient based on their anatomy.

[Operator]

Our next question comes from Patrick Wood with Morgan Stanley.

[Patrick Wood, analyst]

I'll just ask them both upfront, if I can. I'd love if you could unpack a little bit more on the Endoscopy side of things. I know you talked about sports med and visualization outside, but any extra details there would be awesome.

And then the second one, just to riff on Shoulder again. Just like any extra details you've got on -- I know you're on limited release on Mako Shoulder, but just feedback you've been having, how you think about that when we move into '26? And is that a more or less meaningful addition than, say, what we saw Mako do with Knee and then Hip?

[Kevin Lobo, executive]

Okay. Great. I'll start with the Shoulder question. And what I'd tell you is that the Shoulder business is doing great without really the Mako impact. So right now, we're just in a limited release. It's -- Mako has not been a contributor and wasn't in the first quarter in any meaningful way to the growth. But we are very excited about how it's being received in the market, and we think it will be a very meaningful contributor starting in 2026.

And that's really because if you're a surgeon that doesn't do a lot of these procedures, but you have a Mako and you do hips and knees, but you do a smaller number of shoulders, this is fantastic. It makes the procedure easy to do. And right now, we have just the glenoid. Eventually, we'll also add the humeral portion of the procedure. But again, the glenoid is the trickiest part. And so what we're hearing so far is very positive feedback, and we're excited about that.

And as it relates to Endoscopy, our 1788 camera continues to absolutely win with customers, and it continues to be an engine of very high growth.

And then Sports Medicine has been a strong double-digit grower. We have launched about 5 or 6 different shoulder products in the last year, and the most important of which is AlphaVent Knotless, which is a terrific product that's getting great feedback. And so both in the U.S. and outside the U.S., we had very strong double-digit growth in sports med. And we really have a big sports med business now. It started very, very small over a decade ago and really mostly through organic growth because all of these shoulder products we're launching are really all organically driven.

We have built a very strong implant portfolio. We've only done the Pivot deal, the IV deal and InSpace. Only 3 small acquisitions in sports. The rest have all been organic growth, and we're really excited about that.

So those are the 2 biggest contributors. We have a really strong team in Endoscopy. And then, of course, booms and lights in the United States were pretty strong as well. We have a new light called Oculan that just launched, which will also be a big contributor actually in future quarters. We have very strong orders in our Communications business unit, and so you'll see that start to contribute as well. So Endoscopy, it's been a consistent high performer, and that will not change this year.

[Operator]

Our next question comes from Shagun Singh with RBC.

[Shagun Singh Chadha, analyst]

So 2 quick ones for me. On International, you indicated that it could be a significant catalyst for future growth. I'm wondering if you can elaborate on that in terms of just mix of growth expectations?

And then the second question is just on operating margins. Obviously, you guys are doing a great job, and you've elaborated on it. But can you share any long-term expectations on where we could see gross margins and operating margins go?

[Kevin Lobo, executive]

I'll take the first part of the question around International. So now obviously, with Inari coming in, largely U.S.-based business. And all the acquisitions we've done in recent past have been heavily weighted to the U.S. It's now about 75% of our sales are in the U.S. And even just looking at Inari, only 7% of our sales are in international markets with fabulous products. And if you look at our Neurovascular business, it's -- we actually have more of our sales outside the United States. So that alone has a massive opportunity internationally.

And taking all of these great products we've launched and then taking those international markets, we know it's going to be a successful formula. We're seeing it with Mako. And there's always a time delay because of the regulatory process, especially with Europe following the EU MDR legislation. It takes longer to get these products. We know they're successful, they will be successful. And so the surge that you've seen here in the U.S. in the last 2 or 3 years, there's going to be a bit of a time delay, and you're going to see that surge in international markets like we're seeing right now with Mako, surging in Japan and surging in other international markets. That's going to be our formula. And starting with only 25% of our total company there, there's no question that, that is going to be a huge engine of growth in the years to come.

[Jason Beach, executive]

Shagun, I'll take the second part of this of longer-term gross and op margin goals. First off, as you know, we don't guide to gross margin. And if you think about op margin expansion and if you go back to Investor Day back in '23, we said '26 and beyond, kind of 30 basis points of expansion was the floor. We obviously have an Investor Day coming up in November, and we'll certainly do the work to update that as we think about '26 and beyond.

[Operator]

Our next question comes from Mike Matson with Needham & Company.

[Michael Matson, analyst]

Yes. So with the update to the revenue guidance -- sorry, the organic revenue guidance specifically, you're calling out a slightly unfavorable foreign exchange impact. Can you maybe explain what that means? Because I guess I thought that this was constant currency growth.

[Preston Wells, executive]

Yes. So good point. So as we think about where our revenue growth, our organic growth is going to be that. So what we're just saying is, in total, we are expecting some unfavorable currency impacts really as it flows down through to our EPS.

[Michael Matson, analyst]

Okay. Got it. Got it. All right. And then just with the Spine divestiture, I don't know if you guys are willing to disclose how much you got for that business. I assume we'll see something in the second quarter cash flow statement. But maybe you could tell us how much they -- VB paid and what you're doing with the proceeds ? I assume you're repaying debt, but let me know if that's not right.

[Preston Wells, executive]

Yes. So we did not disclose the overall price that we received for that. And so we are getting some -- we're going to have it come back to us actually through some milestones as well. So they will be broken up over time as we see that coming back in. And it will certainly be part of our overall financing as we look at opportunities, whether that's paying down debt or looking at future M&A opportunities as well.

[Operator]

Our next question comes from the line of Caitlin Cronin with Canaccord Genuity.

[Caitlin Cronin, analyst]

Congrats on another great quarter. I'll just ask both of my questions upfront. So I think you noted earlier in the call that the tuck-in acquisitions you made last year were going well. Just any more color on those? And also with continued strong ortho performance, anything to really take away from that and how you're performing in the ASP?

[Jason Beach, executive]

Yes, I'll take the ASC portion of this and Kevin will touch on M&A here. But I think this is very consistent in terms of what we've said in prior quarters where we continue to see more and more procedures move to the ASC. If we think about our percentage of knees and hips that are done in the ASC, that continues to tick up every quarter. And the first quarter was no exception there and has truly been a great tailwind to our business in the first quarter.

[Kevin Lobo, executive]

Yes. And as it relates to the 7 deals that we closed last year, I would say -- and this is quite surprising that all 7 are actually on the model or ahead of the model, which normally you have a couple that are sort of off to a slower start. So actually, they're all performing very well.

I would tell you that the Artelon deal and the Vertos deals are really off to a very fast start. So those -- if I had to kind of pick a couple -- sorry for those people in the other deals, they're all great, we love them all. But I'd say those 2 really have really jumped out of the gate fast, and we're really excited. Those tuck-ins for us, they work really, really well. When we already have the call point, we already have the sales force and we bring a product like this in there. We know we're going to -- good things are going to happen, and that has proven out with these 7 deals.

[Operator]

Our next question comes from Danielle Antalffy with UBS.

[Danielle Antalffy, analyst]

Congrats on a good start to the year. I know the capital equipment question has been beaten to death here. So I'm going to actually ask it a little bit of a different way, I think. And I think one of the lingering questions is will we go into a recession? I mean I think it depends on the day of the week as to what the outlook might look like. But I'm just curious if you guys can talk about how recession-proof or not or where you see the most exposure to your businesses?

And the follow-up I'll just ask now on the capital equipment side. From my perspective, where I've been a little concerned is less about the capital budget number and more about sort of a paralysis as hospitals wait to see what happens with any budget, Medicare, changes to Medicare or things like that. And it sounds like you're not seeing anything change there, but just curious if you could comment on that.

[Kevin Lobo, executive]

So far, we're not seeing any signs of slowdown. Our order book is really elevated. Our backlog is as high as it's ever been. And so we're not seeing any signs of that. Who knows what can happen down the line? But our order book is really out to most of the -- towards most of the end of the year. So we have a pretty good visibility and line of sight, usually around 6-month line of sight into capital. Nobody is canceling orders. We're not seeing inertia setting in, in hospitals at all. They are changing a little bit sometimes, whether they want more financing or not. So the forms of payments might change a little bit. But we're seeing really healthy demand across. We wouldn't be raising guidance if we were concerned about any kind of capital slowdown.

So from our standpoint and, frankly, if you think about our business, small capital is recession-proof because they need to be able to do those procedures. What could really be affected by a recession, beds could sometimes be slowed down a little bit. It's a very small part of our overall portfolio now. And we always said elective procedures, most of ours are not. Most of our procedures are urgent or are needed. You could say maybe you could delay a knee procedure, that's about it.

And so we're not really nervous at all. In fact, what we're seeing is elevated demands for Hips and Knees, a sustained demand. And people aren't -- once they get that surgery schedule, they're not prone to cancel it. So again, through the end of this year, we have pretty good visibility. We don't see any red flags or warning signs at this time.

[Operator]

Our final question comes from the line of Matt Taylor with Jefferies.

[Matthew Taylor, analyst]

I'll just ask one kind of conceptual question about tariff. Just I was wondering, if we woke up tomorrow and the tariffs were gone, and you theoretically have this $200 million back or some function of that, can you talk about how much you would put back into the business versus what would drop through to the bottom line? I want to understand that a little bit better as we may see things change again and again.

[Preston Wells, executive]

Yes. So we're not going to give the specific numbers because as we talked about, we're trying to solve for this tariff impact in a variety of ways. Certainly, we would put some investment back into the business. But I think it's safe to say that without the tariffs, we certainly would have a raise on the bottom line as a result.

[Kevin Lobo, executive]

Yes. If you see the tariffs going down, you should expect a raise from us on the bottom line. And we would have raised our earnings without question had the tariffs not appeared at this time.

[Operator]

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

[Kevin Lobo, executive]

Well, thank you all for joining our call. As you can see, we have a very strong start to the year, and we're excited about working through the tariff challenge as well as continuing with the great business momentum and sharing our Q2 results with you in July. Thank you.

[Operator]

This concludes the First Quarter 2025 Stryker Earnings Call. You may now disconnect.