Stryker Q3 2023 Earnings Call Transcript

Presentation

[Operator]

Welcome to the Third Quarter 2023 Stryker Earnings Call. My name is Crystal, and I'll be your operator for today's call. [Operator Instructions]

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 Lobo, Chair and Chief Executive Officer at Stryker]

Welcome to Stryker's third quarter earnings call. Joining me today are Glenn Boehnlein, Stryker's CFO; and Jason Beach, Vice President of Investor Relations.

For today's call, I will provide opening comments, followed by Jason with the trends we saw during the quarter and some other product updates. Glenn will then provide additional details regarding our quarterly results before opening the call to Q&A.

Before I discuss the quarter, I would like to address the concerns around GLP-1 and what is being misunderstood. Our Knee business is not at risk for a slowdown. There is an oversimplification taking place as it relates to the relationship between weight and knee replacements. This ignores the more important aspects of activity level and genetics. We are, in fact, optimistic about the positive impacts of these drugs in both the short-term and the long-term. In the short-term, it will help to make ineligible people eligible for surgeries sooner. And in the long-term, it will likely lead to more surgery as people increase their activity levels. With that said, the rate and persistence of adoption of these medicines is still a large unknown, as there are significant barriers to this taking place. Lastly, as a reminder, we have a very diversified business, with Knees representing about 10% of our sales.

Now, moving to our third quarter results. We delivered strong organic sales growth of 9.2% against last year's nearly 10% comparable, despite one less selling day versus 2022. This performance included double-digit growth in MedSurg and Neurotechnology and high-single digit growth in Orthopaedics and Spine, reflecting a sustained robust demand environment and our team's strong commercial execution.

Our results were strong across the globe with high-single digit growth in both the US and international markets. In addition, we remain focused on our pricing initiatives, once again, realizing positive overall price.

We delivered quarterly adjusted EPS of $2.46, reflecting a 16% growth compared to the third quarter of 2022. This result was primarily driven from the strength of our sales, but also demonstrates continued margin recovery. Finally, we are narrowing our expectations for 2023 to the high end of our previously provided guidance ranges, and now expect full-year organic sales growth of 10% to 10.5% and earnings per share of $10.35 to $10.45 a share.

Coming off our full-year 2022 organic sales growth of nearly 10%, a 10%-plus organic sales growth in 2023 reflects the strength of our supercycle of innovation and our team's sustained high performance. And we are encouraged by an important step in our margin improvement this year.

I will now turn the call over to Jason. Thanks, Kevin. My comments today will focus on providing an update on the current environment, as well as capital demand, including Mako, and an update on product launches. Procedural volumes remained strong and we continue to expect patient backlog will support elevated orthopaedic procedural demand through 2024. And while hospital staffing pressures and supply constraints continue in pockets around the globe, these challenges are resolving gradually and will continue to be a tailwind through the end of the year and into 2024. Demand for our capital products remained healthy in the quarter with double-digit organic growth in our Endoscopy and Instruments divisions. Our capital order backlog remains consistent with Q2 and elevated well-above normal levels. Also demand for Mako remains robust with strong US and international installations, which will continue to drive our Hips and Knees business. Next, our product supercycle continues to drive positive momentum. In Q3, our 1788 camera platform moved to its full launch, which is gaining traction in the market and driving strong order growth. In addition, we received 510(k) approval for our Pangea plating system in our Trauma and Extremities division. Pangaea will be the largest launch in Trauma's history and is a very comprehensive system that will facilitate complete hospital conversions. We are gearing up for a full launch in the second quarter of 2024. We have also extended the capabilities of our Vocera platform to now be compatible with our newly-approved Prime Connect stretchers, the first wireless stretcher on the market. This wireless feature can be added to existing and new stretchers, and will help address patient safety in the emergency room setting. These launches will continue to support our growth for multiple years. Our Mako spine and shoulder applications are on track and we've received positive feedback from surgeons who have been exposed to the technology. As a reminder, on November 8th, we are hosting our Investor Day with the theme delivering leading growth, which will be webcast live on the Investor Relations page at stryker.com. We will have prepared remarks from numerous leaders across Stryker, followed by a guided product tour for those attending live. We will showcase several of our exciting product launches with investors and analysts having the opportunity to interact with many members of our leadership. We're excited to provide our priorities and expectations for Stryker in the coming years. With that, I'll now turn the call over to Glenn.

[Glenn Boehnlein, Vice President, Chief Financial Officer at Stryker]

Thanks, Jason. Today, I will focus my comments on our third quarter financial results and the related drivers. Our detailed financial results have been provided in today's press release.

Our organic sales growth was 9.2% in the quarter. The third quarter of 2023 had one less selling day than 2022. The impact from pricing in the quarter was favorable by 0.3%. We continue to see a positive trend from our pricing initiatives, particularly in our MedSurg and Neurotech businesses, almost all of which contributed positive pricing for the quarter. Foreign currency had a 0.3% favorable impact on sales.

In the quarter, US organic sales growth was 9.3%, International organic sales growth was 8.9%, impacted by positive sales momentum across most of our international markets, particularly Australia, Europe and emerging markets.

Our adjusted EPS of $2.46 in the quarter was up 16% from 2022, driven by higher sales, operating margin expansion and a lower adjusted income tax rate, partially offset by the impact of foreign currency exchange, which was unfavorable $0.02.

Now I will provide some highlights around our quarterly segment performance. In the quarter, MedSurg and Neurotechnology had constant currency sales growth of 10.3% and organic sales growth of 10.1%, which included 10.9% of US organic growth and 7.4% of international organic growth. Instruments had US organic sales growth of 17.3% with strong double-digit growth across both the surgical technologies and orthopedic instruments businesses.

From a product perspective, sales growth was led by power tools, Steri-Shield, waste management, smoke evacuation and surge account. Endoscopy had US organic sales growth of 10.6% with strong double-digit growth in its Communications and Sustainability businesses. In September, the Endoscopy business continued its full launch of the 1788 camera system, which provided strong sales momentum at the end of the quarter.

Medical had US organic sales growth of 5.7% led by performances in its emergency care and Sage businesses and was impacted by a strong comparable -- growth comparable in 2022 of almost 14%. Medical continues to have a large backlog of capital orders and we expect a solid Q4 despite a huge Q4 comparable.

Neurovascular had US organic sales growth of 8.7%, reflecting a strong performance in our Hemorrhagic business. Neuro Cranial had US organic sales growth of 14.5%, which included double-digit growth in all three business units: Neurosurgical, CMF and ENT.

Internationally, MedSurg and Neurotechnology had organic sales growth of 7.4%, reflecting double-digit growth in our Instruments, Endoscopy and Neuro Cranial businesses. Geographically, this included strong performances in Australia, Europe and most emerging markets.

Orthopaedics and Spine had both constant currency and organic sales growth of 8%, which included organic growth of 6.9% in the US and 10.6% internationally. Our US Knee business grew 5.3% organically, which reflects our market-leading position in robotic-assisted knee procedures. Our US Hip business grew 3% organically, reflecting solid primary hip growth, fueled by our Insignia hip stem. Growth for both our Knee and Hip businesses reflects one less selling day in the quarter and a very strong comparable in 2022 of 12.4% for Hip and 14% for Knee.

Our US Trauma and Extremities business grew 11.5% organically with strong performances across all businesses led by upper extremities and foot and ankle. Our US Spine business grew 5.4%, led by the performance of our enabling technology and interventional spine businesses including the recently-launched Q Guidance navigation system.

Our US Other Ortho increased organically by 1.8% due to higher Mako placements in the quarter. Internationally, Orthopaedics and Spine grew 10.6% organically, including strong performances in Australia, Canada and most emerging markets.

Now, I will focus on operating highlights in the third quarter. Our adjusted gross margin of 64.7% was favorable approximately 210 basis points from the third quarter of 2022. This improvement was primarily driven by the easing of certain cost pressures that we experienced in 2022, decreases in spot buy purchases and the benefit of price and mix.

Adjusted R&D spending was 6.8% of sales, which represents a 30 basis point decrease from the third quarter of 2022, primarily due to a higher comparable in 2022 related to the ramping of costs for product launches.

Our adjusted SG&A was 34.5% of sales, which was 140 basis points higher than the third quarter of 2022 due to continued investments, including sales growth incentives and a more normalized cadence of travel and meetings. We expect our full-year SG&A as a percent of sales to be in line with 2019 levels, as we continue to invest for growth.

In summary, for the quarter, our adjusted operating margin was 23.4% of sales, which was approximately 110 basis points favorable for the third quarter of 2022. This performance is driven by the aforementioned easing of certain cost pressures primarily on gross margin. Adjusted other income and expense of $61 million for the quarter was slightly higher than 2022, driven by increased interest expense, partially offset by higher interest income. The third quarter of 2023 had an adjusted effective tax rate of 13.2%, reflecting the impact of geographic mix and certain discrete tax items. For 2023, we now expect the full-year effective tax rate to be approximately 14%.

Focusing on the balance sheet, we ended the third quarter with $1.9 billion of cash and marketable securities, and total debt of $12.7 billion. During the quarter, we paid down $100 million of debt.

Turning to cash flow. Our year-to-date cash from operations is $2.2 billion. This performance reflects the results of net earnings and higher accounts receivable collections.

Considering our year-to-date results, our robust backlog for capital equipment and continued positive procedural trends, we now expect full-year 2023 organic sales growth to be in the range of 10% to 10.5%. We expect pricing to be slightly positive for the full-year. If foreign currency exchange rates hold near current levels, we anticipate sales will be unfavorably impacted by approximately 0.6% and adjusted EPS will be unfavorably impacted from $0.10 to $0.15 per share for the full-year, both of which are included in our guidance. Based on our performance in the first nine months of the year, together with our strong sales momentum, we now expect adjusted earnings per share to be in the range of $10.35 to $10.45 per share.

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

Questions and Answers

[Operator]

[Operator Instructions] The first question comes from Larry Biegelsen with Wells Fargo. Your line is open, sir. You may begin.

[Lawrence H. Biegelsen, Analyst at Wells Fargo Securities]

Good afternoon. Thanks for taking the question and congrats on another good quarter here. Kevin or Glenn, you're guiding to over 10% organic growth this year. Now, what are some of the puts and takes to consider for next year on the topline and the bottom-line? So any color on currency at this time. And we've seen a lot of companies increase their tax rate beyond '23 or guide to higher tax rate beyond '23. Anything we should be aware of with Stryker? And I had one quick follow-up. Thank you.

[Glenn Boehnlein, Vice President, Chief Financial Officer at Stryker]

Hi, Larry. I'll start out here and then Kevin can pile on. First of all, we're super-excited about 10% to 10.5% growth for the full-year 2023. And stay-tuned to January, and we'll guide on 2024. As I think about currency, it was a little bit of a headwind in Q3, it's a little bit of a headwind in Q4. We don't necessarily think that it's going to get worse, but it's probably going to stay right where it is. We'll assess that for 2024 when we get to January for that guidance. And then on tax, we just continue to have some favorability on some of our discrete items and also the way our sort of global mix of taxable income is rolling up, and that has helped us [Technical Issues].

[Kevin Lobo, Chair and Chief Executive Officer at Stryker]

Yeah, just to finish on tax, as it relates to Pillar Two, at this point, we're not projecting really anything negative next year, if you think about our overall tax position. But of course, we'll include that in our guidance early next year. Thinking ahead, I keep talking about the supercycle of innovation and it is really in full swing. You've seen that with the camera launch, you saw that with the amazing Instruments performance in Q3 on the backs of the Neptune S launch and the power tool launch, which is really gaining momentum. And then we've got a very exciting next-generation professional defibrillator launch starting early next year. So we feel very good about our momentum really driven behind innovation and strong commercial execution.

[Lawrence H. Biegelsen, Analyst at Wells Fargo Securities]

That's helpful. And just one on the margins. I know you're going to talk about the long-term -- sprinting back to pre-COVID operating margins next week at the analyst meeting. So I don't -- I know you're not going to front-run that. But my question is, how much visibility do you have and what's driving that getting back to pre-COVID margins? Thanks for taking the questions.

[Glenn Boehnlein, Vice President, Chief Financial Officer at Stryker]

Yeah. That's a good question, Larry. [Technical Issues] we will give you more color on it next week at the analyst meeting. What I can say for now though is that we have pretty good visibility to the sort of our supply chain, our raw material purchases to the extent possible, we enter fixed contracts related to the pricing of that, which certainly impacts our outlook for 2024. We're not seeing any more spot buys, they're basically have gone away for Q3. And so, we do feel pretty positive about that.

We're also feeling better about our freight as things get a little more normalized. And we're seeing less expediting of raw materials or even products. So we're in a good position there. I would tell you that all of this has a backdrop of inflation that we know we have to offset as we move forward and as we sprint back to 2019. So we are working on that. Part of the strategy around that has really been a [Technical Issues] pricing. And we will continue to work on our pricing strategy as we enter next year.

[Lawrence H. Biegelsen, Analyst at Wells Fargo Securities]

Thank you.

[Operator]

The next question comes from the line of Robbie Marcus from J.P. Morgan. Your line is now open.

[Robert Marcus, Analyst at J.P. Morgan]

Oh, great. Thanks for taking the questions. Wanted to start on Ortho, in Hips and Knees. And we've seen this a lot this quarter with increased seasonality. Wondering if you could speak to the trends in the quarter. Do you think you're still gaining share? And do you expect normal seasonality to return in fourth quarter? Thanks.

[Jason Beach, Vice President - Investor Relations at Stryker]

Yeah, sure. I'll take this question. I would say, we did see what I'll call the more normal seasonality after the last few years of turbulence, starting with the pandemic. And so, what that means is we think Q4 is going to be strong -- seasonally strong as it was going back to '17, '18, '19. We're already seeing that kind of with the month of October. So I think we're doing fine. We -- our businesses did not surprise us in terms of the results that we had and obviously we had giant comps from last year, if you look at the growth we had in the Q3 of last year. We feel very good about our position in both Hips and Knees, and expect to have a good fourth quarter.

[Robert Marcus, Analyst at J.P. Morgan]

Great. And maybe following-up, same line of thought. Other Ortho had a nice quarter. Maybe you could just speak to trends in robotics and Mako in placements and just the capital equipment environment overall. Thanks.

[Kevin Lobo, Chair and Chief Executive Officer at Stryker]

Yeah. Look, the capital equipment environment overall is healthy. You see that in Endoscopy and Instruments numbers. Even Medical -- the full-year Medical is going to be double-digit growth. It will be our fourth consecutive year of double-digit growth in Medical. Obviously, Q3 was a little softer than Q2, which was huge. And large capital does -- will vary a little bit from quarter to quarter, but overall the environment is healthy. You saw the OUS numbers for Other Ortho were very big. So Mako is really picking up in both Asia Pacific, as well as EMEA. But what we are -- so overall just tremendous momentum across our business on the capital side.

[Robert Marcus, Analyst at J.P. Morgan]

Great. Thanks a lot.

[Operator]

The next question comes from the line of Bill Chickering [Phonetic] with Deutsche Bank. Your line is open. Please go ahead.

[Pito Chickering, Analyst at Deutsche Bank Aktiengesellschaft]

Hey, guys. It's Pito. On the margins, I realize that you're not giving us margins sort of for 2024 yet, so focusing on the third quarter gross margins. Can you bridge us on how you grew 220 basis points year-over-year and how that compares to the guidance last quarter about gradual margin improvement? Are there any one-timers in there? Because, you're already sort of within 100 basis points of where you were in third quarter of 2019.

[Glenn Boehnlein, Vice President, Chief Financial Officer at Stryker]

Yeah. There's a couple of pieces here. Obviously, one of the pieces is where we were a year ago, as you looked at Q3 and the impacts we were feeling pretty severely from spot buys. Fast-forward to where we are now, we're not seeing any spot buys. A lot of that has flushed through the income statement already. So that's some given improvement right there. We're also seeing sort of a more normalization of supply chain management. So a lot of that means we can get back to things like ocean freight and not airfreighting all the time. We can have regular manufacturing, scheduling and cadence, which means that we don't have people cycling in and out, which is really inefficient. And so, I think, that, combined a little bit with sort of the mix that we saw within the quarter, just really helped us give a lift to the gross margin. I mean, we still expect gradual improvement. And I think that's what you'll see. Keep in mind, for Q4, seasonally, it's a big MS&T quarter. And so we'll feel that mix impact in Q4 in the gross margin.

[Pito Chickering, Analyst at Deutsche Bank Aktiengesellschaft]

Okay. And the follow-up question, well, you talked about a big backlog in Medical. Are you seeing hospital capex continue to grow as more ex improve for the hospitals or are you seeing any impact of the rising rate environment and/or additional pressure on physician compensation, changing how hospitals view capex in the near-term?

[Jason Beach, Vice President - Investor Relations at Stryker]

Hey, Pito. It's Jason. I'll take this one. I think just to build on what Kevin said from a capital environment standpoint, it continues to be strong for us. And I think, just to remind you, as you think about our capital, right, the large percentage of our capital is this revenue-generating capital that has to be replaced with procedures. And so that continues to be strong. And then, again, to Kevin's point on Medical, as you think about a double-digit year, the large capital continues to be strong. So really no change of tone for us as it relates to the capital environment.

[Pito Chickering, Analyst at Deutsche Bank Aktiengesellschaft]

Great. Thanks so much.

[Operator]

The next question comes from the line of Joanne Wuensch from Citibank. Your line is open. Please go ahead.

[Joanne Wuensch, Analyst at Citibank]

Good evening, and thank you for taking the questions. Number one, can you quantify the impact of the fewer selling day?

And number two, you said that the shoulder and spine applications from Mako on track. Could you remind us what on track means and how do you see those products adopting and ramping over time? Thank you.

[Kevin Lobo, Chair and Chief Executive Officer at Stryker]

Okay. Great. Thanks, Joanne. Well, we've always said about one day impact. It's roughly 1% total Company. It obviously has a higher impact on implants than it does on capital equipment, but approximately a 1% total Company impact. And we benefited from a day earlier in the year. I think, it was Q1. And then this quarter, we lost a day. The full-year will be the same number of days.

What we said around the timing is we expect Mako spine kind of around the middle of the year next year. That's on track. We were able to show that to some surgeons at NASS and got very good feedback on that. And that product will obviously be a -- there'll be a Mako application, which I've gotten to see, which is terrific. But it will also include a different -- an additional product is coming out of our Instruments division that'll be used by spine surgeons as well. So we'll have a pretty tremendous ecosystem. And then, Shoulder will be towards the end of the year. We'll have an initial launch of Shoulder. So those are the timelines we communicated previously, and we are pacing on track on both of those products.

[Joanne Wuensch, Analyst at Citibank]

Thank you.

[Operator]

The next question comes from the line of Vijay Kumar with Evercore ISI. Your line is now open. Please go ahead.

[Vijay Kumar, Analyst at Evercore ISI]

Hey, guys. Congrats on a nice print here. Kevin, maybe on that last question on this Mako Spine and Shoulder, can you compare and contrast what a Mako application for spine and shoulder, what the launch curve should look like versus hip and knees? Are there any differences between hip and knee surgeons versus the spine market and shoulder market?

[Kevin Lobo, Chair and Chief Executive Officer at Stryker]

Well, I wouldn't say there's much of a difference, to be honest with you. In the case of spine, you have to remember we were first, right. So, Mako was first. And when you're first, the uptake tends to be a little slower, to be honest; overcoming people's objections, having to have change management. I think, if we think about spine, there are already a couple of players in the market and we already have a very large footprint of robots in the market. So to me, that should be a faster ramp than what we saw with hips and knees.

Shoulder will be different. It will be a first-time application with including bone preparation. So I think that one will probably be slower in terms of its uptake, but our Shoulder business doesn't really need it. It's growing -- it's been strong double-digits for a long-time and we'll continue to have an amazing pipeline. They launched a PyroCarbon product. We have the patient-matched glenoid. We have mixed reality. I mean, with so many new products in Shoulder, it's not exactly like we need it to drive high growth, but it will be, I think, very impactful. But it'll -- because it involves change management, that one probably go a little bit slower. But Spine, especially the way we've designed it, the workflow is very, very seamless. It's very, very efficient. It's smooth. And again, it's not the first one. So I think Spine will probably be a faster uptake.

[Vijay Kumar, Analyst at Evercore ISI]

Fantastic. And maybe, Glenn, one for you. This gross margin performance is pretty impressive in the quarter. When you look at that Q1 to Q3 sequential frame here, is Q3 the right jump-off point? Because, some of the elements you mentioned looks like they seem to be sustainable. I think free cash conversion related to that 60%, I think you had some inventory impact, should that go down for next year and see a more normalized conversion?

[Glenn Boehnlein, Vice President, Chief Financial Officer at Stryker]

Yeah. No, as I said, you're right. Q3 was a very strong performance in gross margin for a lot of those reasons that I talked about. I do think you got to look at, sort of, first of all, seasonality relative to our gross margin. And we talked about that for Q4, just given the amount of MS&T that will flow-through. So I do expect Q4 will moderate just a little, just because of that mix issue. And then, as we get into next year, we'll talk more about that at the Analyst Meeting.

[Vijay Kumar, Analyst at Evercore ISI]

Great. Sorry, on free cash, should that normalize for next year?

[Glenn Boehnlein, Vice President, Chief Financial Officer at Stryker]

Yeah. I mean, we've always targeted between 70% and 80% for free cash flow. And I don't expect that we would move away from that target.

[Vijay Kumar, Analyst at Evercore ISI]

Fantastic. Thanks, guys.

[Operator]

The next question comes from the line of Shagun Singh with RBC. Your line is now open. Please go ahead.

[Shagun Singh Chadha, Analyst at RBC Capital Markets]

Great. Thank you so much. Kevin, there is a lot of excitement about your supercycle of innovation and the products that you already launched or you are yet to ramp. Could you help us better quantify the contribution in '23 and '24? Is it low-hundreds of basis points in '24? I think this quarter alone, I think you beat our numbers by between 500 and 700 basis points for those segments. So it translates to about 130 basis points, if you apply that to a number for '24. But just trying to do some math there. Any color would be helpful.

[Kevin Lobo, Chair and Chief Executive Officer at Stryker]

Yeah. Shagun, thanks for the question. We really haven't been in the habit of providing breakouts of the impacts of new products. It really is why we drive at the high end of MedTech, why we consistently outperform the market by roughly 300 basis points. That's the formula; consistent cadence of new products, combined with really great sales force execution through our decentralized business units, but that's the Stryker model. What's interesting about this cycle is, as you pointed out, it's probably a little bit of a greater impact coming from organic innovation, because so many really impactful products are all launching around the same time.

I mean, if you look at our Trauma and Extremities business, that double-digit growth performance is pretty impressive. And we don't really talk about Trauma and Extremities nearly enough. And then we have this Pangea system which we showed at the OTA conference recently just in the last two weeks and the feedback was incredibly positive. Now, that won't impact our business until the second quarter of next year, but we are ramping up for the launch. Feedback from surgeons was amazing. It's the biggest launch they've ever had, which is going to fuel even more growth on top of an already high-performing business.

So, I think the way to think about it is just we can count on Stryker to outperform in the market very consistently, because of these new products. And breaking out how much of that versus how much is price on new products and mix, we're not going to get into parsing those elements. But rest assured that that is the engine of growth for our Company.

[Shagun Singh Chadha, Analyst at RBC Capital Markets]

Got it. That's helpful. And just as a quick follow-up, can you just remind us how you define Stryker's performance at the high end of MedTech? So how do you define that growth range? Thank you for taking the questions.

[Kevin Lobo, Chair and Chief Executive Officer at Stryker]

Yeah, historically, we've said 200 to 300 basis points higher than the market, Shagun. I would say, right now, it's tracking more towards 300 basis points faster. The market has improved clearly versus where it was few years ago. But we continue to outperform at that kind of level.

[Shagun Singh Chadha, Analyst at RBC Capital Markets]

Thank you.

[Operator]

The next question comes from the line of Ryan Zimmerman with BTIG. Your line is now open. Please go ahead.

[Ryan Zimmerman, Analyst at BTIG Research]

All right. Thanks for taking my questions. I want to dovetail on Shagun's question and also Larry's earlier question on '24 and ask in a different way. I appreciate you guys have always been at the higher end of MedTech. But Kevin, when you think about some of the puts and takes that you outlined, be it robust orthopaedic demand, offset by some of the staffing issues that we're seeing at hospitals, do you anticipate '24 to be at a growth rate similar to kind of what we think of as historical MedTech growth rates in that 4% to 5% range?

[Jason Beach, Vice President - Investor Relations at Stryker]

Hye, Ryan. It's Jason. I'll just jump in here and then we'll open it up for your follow-up. But as we think about 2024, obviously, we will get into that more in January. I can give you a little bit more detail. But at this point, we won't comment any further in terms of how we're thinking about the topline.

[Ryan Zimmerman, Analyst at BTIG Research]

Okay. I had to try it in a different way. So I appreciate it. All right. I'll turn -- I'll shift directions then and just ask, you're ahead of your Knee business, just gave an interview actually yesterday that I thought was really interesting and you disclosed that there's about 300 robots and Makos that is in ASCs today. And I'm wondering where you see that market topping out at or where you see from a socket perspective, I mean, if there is 12,000 ASCs in the US today, I mean, there is no way that all of them can own a robot although that would be nice to think. I guess, I'm curious kind of, as we've thought -- as we've seen the ramp of Makos, I mean, initially it was maybe 2,000 hospitals, and then it was potentially all 5,000 hospitals in the US. It's early days in ASC, but where do you think that can go over time as you sit here today?

[Kevin Lobo, Chair and Chief Executive Officer at Stryker]

Yeah, listen, Mako is performing extremely well in the ASC. And just as a reminder, right now our hip and knee procedures roughly, call it, 12% of those are being done in ASCs. That number is growing dramatically and will continue to grow dramatically. And as surgeons move their business to the ASC, they do not want to suffer. They want the best technology, they want Mako. So I see tremendous upside in Makos in the ASC. Because they want to be able to do it, it lends itself very well. There's less instruments, which means less pressure on sterilization, which is a major bottleneck within ASC. They don't have the same room for sterilization that hospitals do. So it's actually a very, very effective product to have in the ASC.

And so, as that percentage of 12% moves, and based on different pundits, it's somewhere between 30%, 40%. As that goes higher, you're going to see more and more robots being installed in these ASCs. So there is a significant upside in front of us here in United States. And frankly, ASCs, now they're starting to talk about it in multiple countries in Europe. In Switzerland, they're talking about it. In Germany, they are talking about it. And in the UK, they're starting to figure out that this model is actually a good model for the delivery of healthcare. Good for surgeons, good for staff. Staff, frankly, nurses love going to ASCs. We're having less issues on staffing in surgery centers than we are in hospitals. And good for the patients. Patients actually like going to a place where there aren't sick people and where there's easy parking and where you can go home the same day.

[Ryan Zimmerman, Analyst at BTIG Research]

Thank you.

[Operator]

The next question comes from the line of Matthew O'Brien with Piper Sandler. Your line is now open. Please go ahead.

[Matthew O'Brien, Analyst at Piper Sandler Companies]

Afternoon. Thanks for taking my question. Kevin, that Mako line this quarter was pretty eye popping. So I'm kind of wondering, J&J launched a system in the AAOS this year. And I'm not sure it's all that great, but [Indecipherable] is pushing as well. Did you see a pause in the market with some of those dynamics? And then that's kind of behind you now and you're winning a disproportionate share of Mako sales/placements. And then specifically within there, are you getting more of those placements into competitive accounts than you have historically or is it still kind of a reasonable mix between existing Stryker accounts and then competitive accounts?

[Kevin Lobo, Chair and Chief Executive Officer at Stryker]

Yeah, we're not really seeing much of a change in the mix between competitive and, let's call it, Stryker-friendly accounts. It's pretty similar as it's been, frankly, throughout the launch. There really hasn't -- it's really people who want technology and are really looking for the best that they can get. And what we saw with the competitive products came on the market is, we saw a little bit of a slowdown as they evaluated side-by-side, different companies, but it was pretty modest. And I would say, now, really we're not concerned about the comparison side-by-side, we frankly encourage that, that they look at the product side-by-side. We really believe we have the best solution for hip and knee replacement in the same robot. And then, of course, look forward to adding other applications, again, to the same robot with the spine and shoulder in the coming periods.

[Matthew O'Brien, Analyst at Piper Sandler Companies]

Yeah, it makes sense. And then, Kevin, again, you touched on this at the beginning, but GLP is dominating the conversation for all of us on this call. There is some Shanghai data out there about a big reduction in knee replacements. And that study, although I'm not sure that study is all that robust, there's another OA study coming out fairly soon that we're all looking at. I'm just curious what Stryker has looked at internally that gives you that comfort that you can tell investors confidently that this is not going to be an issue, not necessarily now, but in two, three, five years from now. And then I don't know if you can talk a little bit about some of these near-term benefits that you're seeing in terms of some patients that have lost weight that are now eligible to get a knee or hip replacement. Thanks.

[Kevin Lobo, Chair and Chief Executive Officer at Stryker]

Yeah. Thanks. Look, I'm not going to use today's call for this, because we have an Analyst Day next week and Investor Day and we're going to have a surgeon there. And we'll actually devote some time to the GLP discussion.

What I would tell you is, the studies saying that there's going to be a reduction, I think, are nonsense. And here at AAHKS Meeting in Dallas right now spent the morning talking to multiple surgeons at massively credible teaching hospitals -- world-renowned teaching hospitals who have poured through the research and feel that there is no need for us to worry whatsoever about any slowdown in our knee procedures.

[Matthew O'Brien, Analyst at Piper Sandler Companies]

Great. Thank you.

[Operator]

The next question comes from the line of Josh Jennings with TD Cowen. Your line is now open. Please go ahead.

[Eric Lu, Analyst at TD Cowen]

Hi. This is Eric on for Josh. Thanks for taking the question. Looking at Spine, there has been some consolidation in the last few quarters. And I was just wondering if you could share a little more detail on your observations in that market. Do you think you're benefiting from any share shifts? Are you making any competitive rep hires? Any detail there would be great. Thanks.

[Kevin Lobo, Chair and Chief Executive Officer at Stryker]

Yeah. Look, it's still early days, if you're thinking about the big consolidation that's occurring. And it's not the only one, right? The last four or five years, we've seen quite a bit of consolidation. There's still more operators in spine than we see in some of our other specialties. But I think one of the drivers of the consolidation is enabling technologies. It really is sort of ticket to the dance to be successful long-term is having really good enabling technologies. Our Q Guidance system, we're delighted with the performance of that with the fastest camera on the market, which we developed internally at Stryker and that Q card will then be paired with Mako in the future, which is really exciting and will provide an even smaller footprint than what you see with the other spine enabling technology ecosystem. So I think that's really the catalyst for the future is. And that will probably provide even more consolidation going forward.

But as it relates to sales force, little early days right now. Not a lot of change. I think you're going to see more of that change as you roll into next year when they have to decide who is in which territory, who is in which person. They're sort of holding things constant for now. But that disruption will come and we look forward to taking advantage of that however we can.

[Eric Lu, Analyst at TD Cowen]

Understood. Thank you. And then maybe on M&A, I was just curious to hear your latest thoughts on deals, given the current market environment. And secondly, are there any areas of the portfolio that you think could be targets for inorganic growth? Thank you.

[Kevin Lobo, Chair and Chief Executive Officer at Stryker]

Yeah. First of all, I would say, every division has targets for inorganic growth. So we have a decentralized business development model at Stryker. Every division had a list of companies and they're just waiting for our cash position to improve such that we can start doing more deals. Obviously we've done a couple of deals this year between the Cerus deal and the Palm [Phonetic] deal within our Instruments division. But we are lining up targets. There are numerous opportunities. The landscape is pretty rich with targets. Valuations in some cases have come down, which is not a bad thing. But on the other hand interest rates have gone up. So, the hurdle rate to achieve the right level of financials is raised a little bit. But we're feeling good. We're paying down debt in line with what we had committed to the rating agencies.

And Glenn, how do you feel about our willingness to start doing deals?

[Glenn Boehnlein, Vice President, Chief Financial Officer at Stryker]

Yeah. I think we will live up to our commitments and assertions relative to our debt position at the point we get to the end of this year. And so, to Kevin's point, there's a long list from all of our divisions in terms of potential acquisitions. I wouldn't say that we really sort of sat on our hands during this period of time. We have engaged with several companies to look at the possibilities. So I do think that M&A is a big part of our growth strategy moving forward. And I'm certain that we'll pick up the pace in 2024.

[Eric Lu, Analyst at TD Cowen]

Great. That's helpful. Thank you, guys.

[Operator]

The next question comes from the line of Travis Steed with Bank of America. Your line is now open. Please go ahead.

[Travis Steed, Analyst at Bank of America]

Hey, just want to follow up on the M&A question. Just curious if you'd put a little bit of a framework around kind of the size of deals you're willing to do or what we should kind of expect when you move into sort of the larger deals you've commented on in '24.

[Kevin Lobo, Chair and Chief Executive Officer at Stryker]

Yeah. Look, M&A is very fluid. We're not going to really comment on the size of deals. Over time, obviously, the larger volume of our deals are going to be smaller tuck-ins, but -- our debt-to-equity ratio is getting right around close to that 2.5 level. That's a nice level to be -- to hit. And once we hit that level, then we have the freedom to be able to do, what I call, main course sized deals. I think we've been on an appetizer diet towards the end of last year and into this year. And we have the capacity to be able to do $1 billion deals if they present themselves and if the returns are strong. So, not going to predict exactly what will happen, but we're going to get back to kind of our normal offense in M&A that you saw for the last 10 years, prior to the big spending on Wright Medical and Vocera.

[Travis Steed, Analyst at Bank of America]

Great. That's helpful. And then, I know you're not going to give the answer, but just curious if you kind of level-set what we should expect at the Analyst Day. Are you going to give some sort of revenue and margin long-range plan? It sounds like '24 guidance won't be until January. Just curious if you kind of level-set what we should expect there. Yeah, Travis. This is Jason. Couple of comments I would say. First off, to your point, as it relates to specifically 2024, we'll get into that more in January as you think about Investor Day next week. It will be kind of the more of a long-range plan. We've certainly talked about sprinting back to 2019 margins. You'll hear more about that and when we'll get back there. And then also just how we think about growth over the next three years as well. So -- but again, we'll narrow in on 2024 in January. All right. Great. Thanks a lot.

[Operator]

The next question comes from the line of Richard Newitter from Truist Bank. Your line is open. Please go ahead.

[Richard Newitter, Analyst at Truist Securities]

Hi. Thanks for taking the question. Just coming off NASS a couple of weeks ago, I figured I'd ask a question on the spine robot. It sounds like you guys are still very optimistic on the timing for a launch, I guess -- I think it's second half of next year. Just correct me if I'm wrong on that. We heard from Medtronic they've already got and adapted the Mazor X system to get to a bone-cutting capability. I'd love to just hear what kind of capability should we expect with your initial launch from an indication standpoint. Should we expect you to be at a point where others, second, third, fourth generations are? Or are you going to be starting off walk before you can run pedicle screws and stay-tuned?

[Kevin Lobo, Chair and Chief Executive Officer at Stryker]

Yeah. Listen, yeah, we're targeting kind of, let's call it, Q3 for the spine robot on Mako. What I'd say is that we -- the Mako launch for spine will be for pedicle screw placement, but it is a fabulous workflow faster than what's on the market today and smoother. So I'm really pleased with what I've seen with our Mako spine robot.

In addition, I keep mentioning we have this additional product that will be launched within the same ecosystem using the same navigation card that does bone cutting. It is not specifically a Mako product, it's a different product, but it operates within the same ecosystem. So I believe that we'll go from today, being behind to being ahead of the market with the launch of those two. And those two products are coming at the same time. So the other product, the bone-cutting product will arrive at the same time as Mako and provide a really fabulous ecosystem.

[Richard Newitter, Analyst at Truist Securities]

Okay. And thank you for that, Kevin. And then just on augmented reality, can we assume that the application you have in shoulder, I think, for right now, that that's going to go to other orthopaedic areas? Do you have any timeline for that or is that something we'll hear more about next week? Thanks.

[Kevin Lobo, Chair and Chief Executive Officer at Stryker]

Look, I'm not sure we're going to tell you a lot more about it next week, but we're big believers in -- well, the term we use is mixed reality, so that you can actually sort of see through the rest of the room and also see the screens. We're big believers in mixed reality is going be a big part of the future, so you don't have to look sideways when you're doing procedures, you look right into the surgical field. But I'm not sure we're ready to give you timelines on that, but that's something we believe is going to be powerful. We're already seeing some of the value with shoulder. And we have every intention of expanding that to other applications in the years ahead.

[Richard Newitter, Analyst at Truist Securities]

Thank you.

[Operator]

The next question comes from the line of Drew Ranieri with Morgan Stanley. Your line is now open. Please go ahead.

[Andrew Ranieri, Analyst at Morgan Stanley]

Hi. Thanks for taking the questions. Kevin, for you, you were talking about your strong US and OUS Mako replacement growth, but you were also talking about change management when it comes to maybe the spine or the the shoulder application. When you do think about OUS geographies for Mako, can you just talk about the utilization that you do see for hips and knees, because there is a bit of a change management there. Robotics is fairly new OUS. But are you seeing any type of acceleration compared to what you saw in the early days of the US launch?

[Kevin Lobo, Chair and Chief Executive Officer at Stryker]

Yeah. Listen, we're right now in Asia Pacific and even outside of, let's say, the UK, the rest -- let's call it the rest of EMEA. We're kind of right now where we were five, six years ago in the United States. So we are seeing an inflection point. We're seeing things really start to take off in -- not in Australia, because that was a fast adopter, but in Japan, for sure; in India, for sure; in some of the other European countries where it's really starting to take off. And it's kind of the inflection point. We saw this sort of terrific growth here in the US started about five, six years ago. That is now starting to happen in these other markets. Really, really exciting. And you see that with the Other Ortho number just kind of starting to pop and you see that in the Hip and Knee business, the growth that we're seeing internationally. I think that's going to be a gift that will keep on giving for the next few years, because it took us a while, honestly, to get going in some of these markets. And we're now starting to hit our stride and feeling very bullish about the future of Mako. And this is just with hips and knees, forget about -- not even thinking about spine and shoulder. Just -- it was -- it just took a little longer to get surgeons onboard to figure out the model, to get the MPS training, to get the language translation. There's all these steps we had to sort of go through. We've been through that and now we're starting to really realize terrific growth. And I think that will continue in the years ahead.

[Andrew Ranieri, Analyst at Morgan Stanley]

Thank you. And maybe I'll save this one for next week, but just on GLP-1, just talking to a couple of ortho surgeons ourselves. I got the sense that they actually do have your BMI patients still manually versus robotics. If you do actually see a near-term benefit, as these patients do lose weight, would you expect to see more of a mix benefit on Mako or just kind of a rising tide lifts all ships for your Knee business? Thanks for taking the question.

[Kevin Lobo, Chair and Chief Executive Officer at Stryker]

Yeah, to me, it's a rising tide lifts all ships. And whether they do manually or doing with Mako, that's really a surgeon choice. It's not really tied to how thin or how heavy somebody is, whether they choose to do it manually or choose to do it robotically.

[Operator]

The next question comes from the line of Danielle Antalffy with UBS. Your line is now open. Please go ahead.

[Danielle Antalffy, Analyst at UBS Equities]

Hey, good afternoon, guys. Thank you so much for taking the question. And I actually had a question. I'm sure you guys will talk about this more next week, so sorry if I'm front-running that. But international looks pretty strong this quarter. Just curious about what you can say what's driving that growth and how sustainable is that.

And then the second part of the question is on the orthopaedic backlog and whether the magnitude of the backlog this quarter versus last, in the quarter prior has come down. Appreciate you believe it's going to continue to contribute into 2024, but I guess I'm just trying to get a sense of the magnitude of that contribution. Going forward, how we should think about that? Thank you so much.

[Kevin Lobo, Chair and Chief Executive Officer at Stryker]

Yeah. Sure. Listen, I'm super-excited about International. As you know, we've now had five consecutive years of International growing faster than US. This year, we're on pace to be the sixth consecutive year. And as I mentioned earlier on the call, Mako is only just starting to really gain steam in a lot of international markets. Our camera business is gaining steam in the international markets. So I think we're really poised. And next week, we, as part of our agenda, we have an international panel that we're going to hold and we have a number of our leaders from our international markets will be there on the panel and even available in the walk around time to be able to chat with all of the investors and analysts. So, we feel bullish about International. That has not always been the case. If you remember, 10 years ago, that was a sore spot for us. It's still a source of tremendous upside. If you look at our business, over 70% of our sales are still in the United States. So we still have tremendous potential in International and that should last for a long time to come.

And then the second part, Jason?

[Jason Beach, Vice President - Investor Relations at Stryker]

Yeah, I'll take the second part here, Danielle. So as it relates to kind of procedural backlog, similar to what I said in my prepared remarks, procedures are strong, right? And so, as we think about kind of Q4 and into next year, I'm not going to try to quantify in terms of percentages of growth that comes with that. But we do think that will remain elevated kind of well into next year. And every quarter we reassess that based on intelligence that we have talking to surgeons, etc. But we do expect it will continue to be a moderate tailwind into next year.

[Danielle Antalffy, Analyst at UBS Equities]

Very helpful. Thank you.

[Operator]

The last question comes from the line of Matt Taylor with Jefferies. Your line is now open. Please go ahead.

[Young Li, Analyst at Jefferies Financial Group]

Hi. Great. This is Young Li in for Matt. Thanks for squeezing us in here. I guess, to start, I was wondering price was positive this quarter, continuing the trend from earlier in the year. I guess, I'm just wondering how sustainable do you think the positive price momentum can be going forward.

[Glenn Boehnlein, Vice President, Chief Financial Officer at Stryker]

Sure. You're right. Q3 kind of continued our favorable pricing trend with sort of 0.3% coming off of Q2 that was 0.5%. A couple of comments I would say as we look at the full year. We think that we'll be positive for the full-year. And we also have put in place kind of the incentive process, as well as the contracting process to really make sure that we're considering price as we think about working with our customers on buying products. So I feel good that we have the sort of mechanism that is going to continue to look at price.

That being said, you're absolutely right. We'll anniversary on product-over-product year-over-year, which may make things a little bit tougher. One thing that I would keep in mind though that Kevin talks about this product supercycle and a lot of next-gen products coming out. So if we think about our pricing calculation, the statistic, it really doesn't include the impact of price increases that we get on those products, because of the technologies that they're bringing to market. So I think that is actually an element of pricing that's going to help us as we think about next year. And I don't think it's something we're going to walk away from. As long as inflation is having an impact, we'll continue to have those discussions with our customers about pricing.

[Young Li, Analyst at Jefferies Financial Group]

All right. Great. And then, I guess for the follow-up, wanted to hear a little bit more on potentially hiring more robotic or capital reps ahead of the shoulder and spine robotic launches. I wanted to maybe get a better sense of how you be entering the market. Is it more of a hybrid sales process with the clinical reps? I mean, I would assume you would focus initially on the existing customers, but maybe how long before you start going on offense and try to convert surgeons with Mako?

[Kevin Lobo, Chair and Chief Executive Officer at Stryker]

Yeah. Listen, we have a very dedicated sales force offense that we run. So even before you think about spine or shoulder, even within joint replacement, we had specialized capital salespeople. We have the same thing with power tools. We have specialized people that sell power tools. So we don't believe in this hybrid model. We're going to have dedicated capital reps and they will go to the market and they will sell to competitive and new surgeons right out of the gate. That's what they do. And that's what we do at Stryker. So I wouldn't expect that we would just go to our friendlies, we're going to go to people that want technology. And we really don't care if they're existing customers or if they're competitive customers, because there isn't -- there really is -- we don't like to have implant reps also selling capital; just not our model. And so, we think we can sell more and faster if we have these dedicated people and we'll have that dedicated approach as we add additional applications to make.

[Young Li, Analyst at Jefferies Financial Group]

Thank you very much.

[Kevin Lobo, Chair and Chief Executive Officer at Stryker]

Thank you.

[Operator]

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

[Kevin Lobo, Chair and Chief Executive Officer at Stryker]

Thank you for joining our call. We look forward to sharing our Investor Day with you on November 8th, and our fourth quarter and full-year results with you in January 2024. Thank you.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Kevin Lobo, Chair and Chief Executive Officer
• Glenn Boehnlein, Vice President, Chief Financial Officer
• Jason Beach, Vice President - Investor Relations

Analysts

• Lawrence H. Biegelsen, Wells Fargo Securities
• Robert Marcus, J.P. Morgan
• Pito Chickering, Deutsche Bank Aktiengesellschaft
• Joanne Wuensch, Citibank
• Vijay Kumar, Evercore ISI
• Shagun Singh Chadha, RBC Capital Markets
• Ryan Zimmerman, BTIG Research
• Matthew O'Brien, Piper Sandler Companies
• Eric Lu, TD Cowen
• Travis Steed, Bank of America Co.
• Richard Newitter, Truist Securities
• Andrew Ranieri, Morgan Stanley
• Danielle Antalffy, UBS Equities
• Young Li, Jefferies Financial Group Inc.