Stryker Corporation

Ladies and gentlemen, welcome to the third quarter 2019 Striker earnings call. My name is Simon, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Following the conference, we will conduct a question and answer session. During that time, participants will have the opportunity to ask one question and one follow-up question. If you would like to ask a question, please press star then one on your touchtone phone. This conference call is being recorded for replay purposes. Before we begin, I would like to remind you that the discussions during this conference call will include forward-looking statements. Factors that could cause actual results to differ materially are discussed in the company's most recent filings with the SEC. Also, the discussions will include certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release That is an exhibit to Stryker's current report on Form 8K filed today with the SEC. I will now turn the call over to Mr. Kevin Lobo, Chairman and Chief Executive Officer. You may proceed, sir.

Welcome to Stryker's third quarter earnings call. Joining me today are Glenn Bainline, Stryker's CFO, and Catherine Owen, VP of Strategy and Investor Relations. For today's call, I'll provide opening comments followed by Catherine with an update on Mako and Mobius. Glenn will then provide additional details regarding our quarterly results before we open the call to Q&A. As I start my eighth year as CEO of Stryker, I am feeling as good as ever about our performance and our outlook for the future. Our Q3 organic sales growth of 8.6% demonstrated balanced strength across business segments and regions. With over 8% organic sales growth year-to-date, we are well-positioned to deliver toward the higher end of our most recent full-year guidance of 7.5% to 8% growth. Orthopedics had an impressive quarter with organic growth of nearly 9%, reflecting excellent results across the portfolio of Mako, hips, and knees. MedSearch continues its strong and steady growth, coming in at approximately 9%, as medical led the way with double-digit growth. Neurotechnology in spine was up approximately 8%, as strong double-digit growth in international helped offset soft legacy striker U.S. spine performance. On a geographic basis, total striker organic sales growth approached 8% in the U.S., with robust gains of nearly 12% outside the United States. As you know, international has been an area of focus and has become a sustainable and consistent above-market grower. This quarter, we had double-digit organic growth in Europe, Japan, and Canada, and emerging markets once again grew strong double digits. Looking ahead, we expect international to be a source of high growth for many years to come. Our conviction stems from several factors, including our lower relative market shares, investments in our transatlantic operating model, and the benefits from strengthened leadership in emerging markets. Turning to the P&L, we saw good results from our cost transformation for growth initiatives, which translated into a 50 basis point year-over-year expansion after absorbing deal-related dilution, and impacts from foreign currency. We also continue to invest in sales, marketing, and R&D to support our long-term growth targets and have a healthy pipeline of new products across our divisions. Overall, with our strong sales performance and margin expansion, we achieved adjusted per share earnings of $1.91, up 13%. With our outstanding management teams, ongoing investments in our sales forces, new product launches, and contribution from M&A, we expect the strong momentum to continue through Q4 and into 2020. I will now turn the call over to Catherine.

Thanks, Kevin. My update today will focus on MAKO and the key data points that allow you to track our success in executing on our orthopedic robotic strategy, along with a few comments regarding our recent acquisition of Mobius. In Q3, we sold 51 Mako robots globally, with 42 in the U.S. By comparison, in the comparable quarter a year ago, we installed a total of 37 robots, of which 26 were in the U.S. Globally, our installed base of robots is approaching 800, with well over 600 in the U.S. We have also launched Mako into Japan, with four robots sold in the quarter. We also performed the first Mako total knee, which was approved in Q3 in Japan. Looking at U.S. procedures, in Q3, Mako total knee procedures approximated 18,000, increasing roughly 60% from the prior year quarter, while total Mako procedures approximated 27,000. Beyond the knee indication, we also continue to see strong demand for Mako hips with 40% year-over-year growth. Looking ahead, our MAKO order book remains robust and supports our expectation for continued share gains in both hips and knees. During Q4, we acquired Mobius Imaging, a leader in point-of-care imaging technology, along with its sister company, Cardin Robotics, in an all-cash transaction for $370 million up front and up to $130 million of contingent payments tied to development and commercial milestones. With this deal, Stryker Spine gains immediate entry into the interoperative imaging segment, as well as aligning with Stryker's implant and navigation offering. Mobius's Aero True CT scanner is a best-in-class, mobile, real-time, diagnostic-quality CT imaging system. In addition, Cardin Robotics is currently developing innovative robotics and navigation technology systems for both surgical and interventional radiology procedures. Overall, these acquisitions are aligned with Stryker's fine strategy of providing a comprehensive offering with more complete procedural solutions. With that, I will now turn the call over to Glenn.

Thanks, Catherine. Today, I will focus my comments on our third quarter financial results and the related drivers. We have provided our detailed financial results in today's press release. Our organic sales growth was 8.6% in the quarter. As a reminder, this quarter included one extra selling day versus Q3 2018. Generally, selling days have an approximately 1% impact on growth. Pricing in the quarter was unfavorable 0.7% from the prior year, while foreign currency had an unfavorable 0.9% impact on sales. U.S. organic sales growth was 7.5, and international organic sales growth was 11.6%. In the U.S., there were strong performances across all businesses. International sales growth was led by emerging markets, Europe, Japan, and Canada. Our adjusted EPS of $1.91 increased 13% from the prior year quarter, reflecting strong drop-through on sales growth combined with good operating expense control. Due to the continued strength of the U.S. dollar, third quarter EPS was negatively impacted by an additional 2 cents. from translational and transactional foreign currency exchange rates. Now we'll provide some highlights around our segment performance. Orthopedics delivered constant currency and organic growth of 8.8%, including organic growth of 9.2% in the U.S. The U.S. performance was highlighted by strong performances in NEIS of 8.9%, including high demand for our Mako TKA NEIS platform. Our trauma and extremities business also had strong organic growth in the U.S. of 8.3%, highlighted by continued ramping of our T2 alpha and by double-digit performance of our foot and ankle and shoulder products. Internationally, orthopedics delivered organic growth of 8%, which reflects solid performances in emerging markets and Europe. MedSurg continued to have strong growth across all businesses in the quarter, with constant currency growth of 10%, and organic gains of 8.8%, which included an 8.1% increase in the U.S. Instruments had U.S. organic sales growth of 2.4% against a difficult Q3 2018 top of 13.5%. As expected, instruments' sales growth slowed in Q3 after very strong performances in Q1 and Q2. Year-to-date, U.S. organic growth for instruments is 12.7%, and is tracking favorably against the prior year to date growth rate of 10.7%. Given a strong order book and demand for its power tools and waste management products, we are confident that Instruments will deliver above market growth in Q4 and the full year. Endoscopy delivered U.S. organic sales growth of 8.6%. Endoscopy had strong performances across its general surgery and video products, including very strong momentum with our 1688 platform. Medical had U.S. organic growth of 12.5%, reflecting solid performance in its SAGE, acute care, beds and stretchers businesses, as well as the physio portion of its emergency care business. Internationally, MedSurge had organic sales growth of 12%, with good performance in Japan, emerging markets, Europe, and Canada. Neurotechnology and spine had constant currency growth of 20.2% and organic growth of 7.6%. This growth reflects strong performance in neurotech and our interventional spine businesses, offset by softness in our core spine business. Our U.S. neurotech businesses posted organic growth of 8.5% for the quarter, driven by strong double-digit growth in demand for our neurovascular products, specifically our hemorrhagic and ischemic stroke products. Additionally, we saw solid demand in our neuropowered instruments business and somewhat offset softer demand from our CMF business. Our spine business saw headwinds during the quarter driven by U.S. sales softness and price erosion. Our K2M integration efforts are ongoing, and we are ahead of our plan relative to realized cost synergies. Related to our Salesforce integration efforts, we are not ramping as quickly as expected. As cross-selling, scaling of rep hires, and full inventory availability is taking longer than we expected. We remain confident that we are in a good path for the future, but now expect 2019 combined sales growth to be in the low single digits. Internationally, neurotechnology and spine had organic growth of 17.6%. This performance was driven by continued high demand for our neurotech products across most geographies. Now I will focus on operating highlights in the third quarter. Our adjusted gross margin of 65.7% was down 50 basis points from the prior year quarter. Compared to the prior year quarter, gross margin expansion was negatively impacted by price and business mix. Adjusted R&D spending was 6.5% of sales, which was 20 basis points favorable to prior year quarter. Our adjusted SG&A was 33.8% of sales, which was favorable to the prior year quarter by 80 basis points. This reflects the continued focus on operating expense improvements through our CTG program. Offsetting this benefit was the negative leverage impact of acquisitions. In summary, our adjusted operating margin was 25.4% of sales, which was 50 basis points favorable to the prior year quarter. Our operating margin primarily reflects good leverage and continued operational savings offset by acquisitions, the latter of which had an approximately 10 basis point negative impact in the quarter. We remain highly confident in our ability to deliver on our full year commitment of driving a 30 to 50 basis point improvement in our operating margin. Next, I will provide some highlights on other income and expense. Other expenses increased from prior quarter primarily due to higher interest expense year-over-year driven by the additional debt related to the $2.5 billion euro offering that was completed in November 2018. Our third quarter adjusted effective tax rate of 16.1% reflects an underlying operating tax rate of approximately 17.4%, partially offset by the benefit related to stock compensation expenses. Focusing on the balance sheet, we continue to maintain a strong position with $2 billion of cash and marketable securities, of which approximately 35% was held outside the U.S. Total debt on the balance sheet was $8.4 billion. Turning to cash flow, our year-to-date cash from operations was approximately $1.5 billion. This reflects the higher adjusted earnings growth offset by acquisition-related charges, higher recall-related payments, and an increase in core working capital primarily related to increased sales. And now I will discuss our fourth quarter guidance. Based on our performance to date and anticipated strength in the remainder of the year, we anticipate full year sales growth towards the higher end of our previously guided sales growth range of 7.5 to 8%. As a reminder, Q4 has the same number of selling days as 2018, and the full year has one additional selling day. Given our year-to-date performance and continued momentum, we now expect that our adjusted net earnings per diluted share will be in the range of $8.20 to $8.25 for the full year. For the fourth quarter, we anticipate adjusted net earnings per diluted share to be in the range of $2.43 to $2.48. This guidance includes an increase of negative foreign currency impact-related to ongoing strengthening of the US dollar across many of our operating currencies. We now expect the full year negative impact related to foreign currency translational and transactional impacts to be approximately 15 cents per share versus our prior estimate of 10 cents per share. And now I will open up the call for Q&A.

Thank you. We will now begin the question and answer session. If you have a question, please press star, then the number one on your touchtone phone. If you wish to be removed from the queue, please press the pound key. As a reminder, callers will be limited to one question and one follow-up question. Your first question comes from the line of Robbie Marcus with JP Morgan. Your line is open.

Great. Thanks for taking the question. Congrats on a good quarter. One business-related question, then one Outlook-related question. Maybe first on the business, the ortho continues to beat and raise here, came in above expectations. Was hoping you could talk about any initial commentary you can add on robotic competition, particularly from Zimmer here, any impact to the business.

Yes, thanks, Robbie. I would tell you we're really pleased with what we're seeing and continuing to execute on what's been a years-long strategy here with 51 robots in the quarter. We're also pleased with the opportunity we have outside the U.S., which we're continuing to build on, including the recent approval in Japan and now having done a Mako Total Knee in Japan. We have approval in China and expect... going forward to get approval for the total knee in China. So overall, we remain focused on our strategy. We're continuing to see the benefit of having indications for the use of the robot on hips, on knees, on cementless knees, and really a global footprint there. So focus on that strategy and think, as we said, we're in a good position to continue to take market share gains.

Brian, maybe just on the outlook, I know you haven't given guidance yet for next year. There's a lot of moving pieces, particularly in med-surg and in neurovascular spine. Hoping you could just give some early thoughts on puts and takes for next year to be aware of.

Yeah. Hi, Robbie. This is Kevin. Right now, as I sit here today, I feel very similar to how I felt at this time last year. So without getting into all the specifics, we just have terrific momentum. across our business and across our geographies. And I sort of made that statement last year, and you've seen the way 2019 has unfolded. So without getting specific about numbers and specific businesses, on an overall basis, we're feeling very, very good about the health of our business and kind of imagine 2020 turning out to be very similar.

Your next question comes from the line of Bob Hopkins with Bank of America. Your line is open.

Hi, thanks. Just to start out, first question for Kevin. You look at the knee performance this quarter and really the orthopedic performance broadly, you saw strength. I was wondering if you could just talk big picture about common themes that drove the performance this quarter. And specifically, is this mostly strikers taking share across the board? Or I was wondering if you could also offer some comments on kind of the health of the market that you operate in within orthopedics.

Yeah, Bob, I think it really is across the board. We're benefiting with really building momentum and surgeon conviction around Mako. We've seen, beginning really in the last couple quarters, with the launch of our new hip and having that approved on Mako, more and more surgeons now adopting hip on Mako and obviously having knees. We continue to see increased penetration for our cementless knee offering, which, as you know, is uniquely 3D printed. and now entering the next leg of that ortho story, which is expanding the footprint of Mako globally. We're really excited with a new Mako training facility opened in China.

In Hong Kong.

Sorry, in Hong Kong, yeah. And selling four robots into Japan, the opportunity that presents for us. So it's no one single thing, but we're taking market share across the board. We believe we're growing above the market in both hips and knees. And we're going to continue to execute on this strategy and feel really good about the order book ahead of us as we think about MAKO going into the fourth quarter and next year.

Okay, great. Thank you. And then for Glenn, I was wondering if you could just comment on, you know, FX and tax rate and the outlook for those because obviously we see you're overcoming a greater headwind here on FX pretty easily. You know, anything that's worth calling out as we look forward on FX or tax rate? that you'd want us to consider as we think about modeling going forward?

You know, Bob, as we look at 2020, and this is not guidance for 2020, so please don't misconstrue this comment, you know, I really think that, you know, Q4, we're also going to have a little bit of headwind on FX just because of where it was sitting last year at that time. I think going forward, though, hopefully we would see it moderate and we wouldn't feel as big an impact as we're feeling in this year. And then on the effective tax rate, you know, we continue to sort of execute on our sort of tax strategies, and we're also continuing to see a really good benefit from the stock comp reclassification within our tax rate. You know, right now as I sit here, I don't see any really big outliers that would make me think differently about our effective tax rate in the future.

Your next question comes from the line of David Lewis with Morgan Stanley. Your line is open.

Good afternoon. Just want to pick up on margins, Glenn, and then a quick portfolio question. So, Glenn, there are some significant ERP programs that are kind of going into place here, I think, within instruments back half this year. The outlook has been 30 to 50 basis points of kind of reported improvement. You've done better than that on an underlying basis. You should think about the momentum in the ERP systems. Is the right way to think about the future still 30, 50 basis points of minimum improvement? Or if we don't see significant M&A next year, can that number actually be a little higher? And then a quick follow-up.

Yeah, I think, you know, first off on ERP, we are executing our program. We're now live with sort of three of our entities on our global SAP platform, corporate, CMF, and instruments. We have an active rollout plan for all of our divisions, and honestly, it's two to three a year, so that will roll out over the next couple years here before we really start to feel that the platform is spread enough across the company that it will drive significant efficiencies.

Okay, just two quick ones for me. Just, Kevin, if you unspine, and maybe a follow-up for Catherine on MAKO. Just unspine, Kevin, obviously I appreciate the update. Is the right way to think about next year, I'm assuming you're expecting acceleration in the spine business pro forma. Is the right way to think about it mid-single digits or can you get back to the corporate rate? And how much of this is just integration versus perhaps just given the movement we're seeing in robotic spine, are you confident this is all integration or could it be some impact from the absence of a robotic system in the portfolio? And then Catherine, I was asking both. For knee performance this particular quarter, procedures were sort of stable sequentially. Typically can't draw much from one quarter trend, but anything you call out from a MAKO procedure perspective, second to third quarter, thanks so much.

Squeezing in two extra questions there, David, but we'll answer them, no problem. So the first thing I tell you on spine, we're really executing our program and our plan and do expect acceleration next year. I'm not going to get specific as to what degree of acceleration there will be, We took a lot of pain early with the sales force getting them all restructured, but this is the first time we've done this type of an integration and really getting the inventory to scale for all of the striker sales people that were dying to sell longer than we thought. Just getting the sales forces all back on track. These things, we're following the right path. We're very optimistic that we've made the right decisions. Our ability to forecast obviously was a little bit off, but we're still growing. which I think is different than most other spine integrations. Overall, our combined business is growing year over year, not mid-single, low-single, but still growing, and we do believe we're on the right path, and it's really more of us executing our plan than any other market factors.

Yeah, and on MAKO, so I think it's really important to pay attention to the year-over-year growth. So if you look at what we said for total needs, we did 18,000, which is becoming an increasingly larger base, and that was up 60% year-over-year. And keep in mind, Q3 is a seasonally slow quarter, so there were simply fewer hip and knee procedures done, whether it's robotics or otherwise. It's just a sequentially slower quarter, historically always has and probably always will be. So when we look at the growth we're seeing in hips and knees, very strong double digits on an increasingly large base. We feel really comfortable.

Your next question comes from the line of Rick Wise with Stifel. Your line is open.

Good afternoon to everybody. You know, hey, Kevin, congrats on eight wonderful years to you and the team.

It's been seven, Rick. This is my – I'm starting my eighth, so it's been seven.

It has been seven wonderful years. If I could start with instrument number, obviously you had a tough, a challenging comp. I appreciate that. I tried to model for that in my model. But for the dollars last year and this year, the step down still in the third quarter versus the second sequentially is a touch more than I might have guessed. Obviously, an excellent quarter overall. But maybe you could help us understand in a little more detail some of the factors driving it and the fourth quarter and beyond. Help us understand what's next and what drives the dollars higher from as well.

Yeah, I think the biggest thing to think about is this year, Instruments had a Salesforce split of their surgical Salesforce. And so if you think about orders that might have been put in by the legacy Salesforce last year, knowing that they were going to work in a split environment, there really was a lot of backlog that was built up for Instruments coming into this year. You know, I think in the first Salesforce got their, you know, got their feet wet, got out to customers. Instruments was delivering a lot out of the backlog. And I think that, you know, now I think that they've got the momentum and we're seeing, you know, that in power tools and in their safety products and waste management products that we are seeing good momentum and fully expect given their current order book to see, you know, good growth in Q4. And honestly, if you look year over year, and I was trying to make this point that sequentially, okay, it didn't flow exactly like we wanted in the nine months. And these things are hard to predict, especially when you split sales forces. But, you know, year to date, they're clearly ahead of where they were last year. And if we look at sort of where they're targeting for Q4, I feel very confident that we're going to have above market growth, again, out of instruments.

Great. And maybe this is for Catherine or Kevin. On Mobius, the interoperative imaging segment, maybe just talk in a little more detail about your expectations and the strategy with Mobius now in the broader striker spine portfolio. And what's this do for the spine franchise? And when do we start to see the impact that see the impact in spine performance. Thanks so much.

Yeah, I think, Rick, it's really about building out a comprehensive portfolio of products and really being able to arm our spine organization with complete procedural solutions. And this is absolutely best in class technology we're bringing in. Longer term, we believe it will be an opportunity to to further bolster our efforts to bring robotic spine to market. It would be premature to get into details there on the timing, but we certainly feel like there's some technology that we can leverage there. But if you look at it fundamentally near-term, it's really about being able to mobile real-time diagnostic quality CT imaging that really helps to facilitate these complete procedural solutions, which is increasingly a trend we're seeing in spine.

Your next question comes from the line of Matt Mixick with Credit Suisse. Your line is open.

Great. Thanks for taking the questions. I'll have two here, just one on some of the trends and one on FX. So the seasonal pattern here went up sequentially, maybe 20% or something, if I had the numbers right on system installs. which is sort of seasonally unusual. And just wanted to ask if there was anything that you've seen in terms of, you know, I mean, we could all hypothesize around people holding off to, you know, see a competitor before they make a decision on Striker. Lots of different ways to look at this, but any color that you've picked up that drove the strength, in particular in the U.S., And then on MAKO also, if I could just, Catherine, if you could mention to us if you're going to be able to show this paper you had tried to show last year at ACAS or any updates on that. And as I mentioned, I have one follow-up on FX.

Yeah, I think really what you're seeing is more just the continued momentum as the features and benefits that are really unique to MAKO continue to get more and more well-known and understood and appreciated within the clinical community, and it's building quarter-to-quarter strength. So there was nothing I would call out as unusual. We're just continuing to benefit from a strategy where we have dedicated sales forces and a capital sales force focused on MAKO. And again, being several years into this, the technology and its benefits have really been validated in the market. I think it's really we're just continuing to execute on a proven strategy. With respect to AUKUS, I believe there's going to be some papers there. We will not have two-year data at AUKUS, just given the timing of that meeting, and then we'll wait and see what may come out at Academy, but we obviously clearly expect to have a very big MACO presence at the meeting, at both meetings.

And then the follow-up, thanks for that, the follow-up on FX. I'm sorry if I missed this when you were walking through the P&L, but was there an impact in any of the operating lines, positive or negative, as this looked like about 40 or 50 basis points, worse effects than we had modeled came through in that 90 basis points, and just wondering how that affects the P&L coming through.

Yeah, yeah. Thanks, Matt. You know, we really don't break out FX impact at that level of detail. You know, so what I can say is that, you know, at an overall level, it was $0.02 per EPS more negative than we had actually anticipated. And I think you'll recall that previously I guided to a $0.10 full year number. We were thinking that FX would moderate in Q3 and Q4 and be fairly flat, but that hasn't been the case. And so we're back to a full year impact of $0.15, which is built into our guidance.

Your next question comes from the line of Vijay Kumar with Evercore ISI. Your line is open.

Hey, guys. Thanks for taking my question, and congrats on a nice sprint here. Kevin, maybe one big-picture question. I had one follow-up. On the U.S. capital environment, maybe could you comment on what you're seeing on the capital front and maybe how the order book is shaping up?

Yeah, across our businesses, whether it's MAKO or whether it's our MEDC, capital environment. So our order book, you've seen that the sustainability of our sales growth over the past couple of years in capital equipment has been just as strong as our implants and our disposables. And we really aren't seeing any change. I would say it continues to be a healthy market for capital equipment.

That's helpful. And Glenn, one quick one on free cash flows. Year-to-date free cash conversion, maybe it seems to be trending a little late. Maybe there's some timing issues, one-off items, maybe a clarify on the free cash front.

Sure. Free cash flow continues to be impacted by our integration expenses and costs related to K2M, which were projected to be more front-end loaded in this year and less back-end loaded. So we will see some improvement because those will start to moderate. As I said, we also have experienced increases in working capital, specifically AR as we As we deploy SAP at Instrum, validate our AR and AP processing into regional shared services, we've also seen a little bit of a tick up in that working capital there. I mean, keep in mind that cash flow generation has always been back-end loaded, and that kind of matches what happens with our sales. It matches what happens with our EBITDA quarterly flows. And so I think we'll continue to see sequential improvement throughout 2019 and expect to see improvement again in Q4.

Your next question comes from the line of Raj Denhoi with Jefferies. Your line is open.

Hi, this is Anthony Farage. Maybe just one on Mako and robotics in general, and then one in neurovascular. On Mako, just wondering how pricing is kind of playing out in that market, just considering there's a couple of new entrants recently, and how that's also playing out, I guess, on implant pull-through. Are you seeing any shifts in implants specifically? Neurovascular, can you give us an idea just on share shift within the divisions when you consider thrombectomy, stenting, embolization, any additional color there would be helpful.

Yes, pricing remains extremely stable with respect to the robot. In terms of pull through, if I'm understanding correctly, once you're using the robot, you need to use it for all our implants that you're doing on the robot, so a hip or a knee. And it obviously gives an opportunity as we continue to sell into competitive accounts for our sales force to sell the portfolio of hips, knees, Mako indication, cementless, revision, et cetera. So, yes, no change in pricing and it continues to be very solid.

Thanks. And the follow-up would be on Neurovascular. Any comments on ShareShift there?

No, we saw very solid growth in both hemorrhagic and ischemic. We really continue to expect to see the bigger impact from our portfolio of aspiration devices in 2020, but that's unchanged commentary from our last update. So overall, neurovascular remains very solid.

Your next question comes from the line of Larry Beagleson with Wells Fargo. Your line is open.

Good afternoon. Thanks for taking the question. I understand that you won't talk about growth for the different businesses in 2020, but I'm wondering if you'll talk about some of the focus products and launches for Stryker that will be meaningful to growth in 2020. And I had one follow-up.

Yeah, given the number of businesses we have and geographies, it's impossible to really give a comprehensive answer. I think largely we're If I were to pull a few highlights, again, not all-inclusive, we talked about the Mako launch continuing to build in the U.S., but now with the knee approval in Japan and expectation for continued momentum outside the U.S., next year we're going into year two of endoscopies camera launch, which historically is the strongest year, so they are really well-positioned with that offering. We talked about some of the trauma products that we're seeing improving momentum coming off of some supply issues. that we had there, and obviously some very good growth in extremities. And then medical is really well positioned going into next year, as is Sage, that has launched some products that will continue to build next year. We feel really good about neurovascular, the opportunity and aspiration, as well as just the overall market opportunity, particularly in ischemic. So at a high level, I'd throw it out there, those ones were just We've got a lot of momentum heading into next year and a cadence of products that are either going into peak product cycle or being launched to continue to support that growth as we think about our goal of continuing to deliver organic sales at the high end of MedTech.

That's very helpful, Catherine. Then one follow-up for Kevin. Kevin, I guess, is chairman of AdvaMed. I think that's the right title. Maybe it would be helpful to hear your latest thoughts on the MedTech tax being suspended for at least one more year. in 2020 and bill over into early 2020 before something is finalized. Thanks for taking the questions.

Yeah, thanks. I'm currently in my first year of a two-year term as the chairman of our trade association, AdvaMed. We continue to believe that the MedTax tax will not be reinstated at the beginning of next year and will be suspended. We are pursuing multi-year suspension. At this point, even repeal is something that we obviously is the ultimate goal, but we're not optimistic just based on the realities of what's going on in Washington that that will happen. But continue to remain optimistic on a multi-year suspension and vehicles that we are hopeful we can attach this to between now and the end of the year.

Your next question comes from the line of Pito Chickering with Deutsche Bank. Your line is open.

Good afternoon, guys. Thanks for taking my questions. The U.S. market continues, the U.S. hip market continues to accelerate pretty nicely here. Can you walk us through how much of that came from hips on the Mako robot versus just taking shares with the Trident 2 hip? And I have a follow-up.

Yeah, so the majority of our hips are still being performed traditional manually, but we're seeing sequential quarter-to-quarter build of the percent. that are done on Mako. And I think part of that is, as surgeons use it for the total knee, they start to think about and trialing it for hips and see the benefits. We're also seeing the benefit of the new Accolade launch. That's our 3D printed hip cup. It's been really well received. We had a very deliberate rollout of that. It obviously can be used on Mako. It's very difficult, Pedo, to parse out growth from the different parts. I would tell you, though, it's really a new product launch and improving momentum with the Mako hip story.

Yeah, I think the bigger factor is this Trident 2 hip cup is really terrific. It is 3D printed. It is very, very modern. And we're getting phenomenal feedback. And it's being used with a variety of different stems. So we had a very good stem portfolio, but the cup really did need to be changed. And that is being used both with Mako and with standard instruments.

Okay. And then for follow-up, going back to the U.S. legacy spine, can you go into a little more detail on what aspects of the cross-selling have been more challenging than expected and how you change that going forward?

Yeah, sure. The most challenging aspect has been the demand for the K2M products from the legacy striker sales force. So it's a pretty large sales force. The K2M offers some really terrific innovative products, and we've just had – challenges scaling the demand, both for the implants as well as the instruments that are needed to put in the implants. And so the demand was very high. We knew which products they would like, but it's been a real challenge to scale. They use OEM manufacturers, and to scale them out, all of that has been challenging and more challenging than we first anticipated.

Comes from the line of Kristen Stewart with Barclays. Your line is open.

Hi, thanks for taking my question. I was wondering if you could just dive a little bit more into the medical performance. It was a lot stronger than I anticipated. I was wondering if you could kind of break out the different subcategories within medical, within physio, I think you mentioned that in the prepared remarks, CH, how that's doing, and then talk a little bit about the beds and structures. I think you guys have a new med surge bed that should be launching next year. I just wanted to confirm that as well and just how we should think about that business in light of sustainability of growth.

Thanks, Kristen. So we don't break out the different components that's behind that U.S. growth, organic growth of 12.5, but I will tell you we had very solid growth from SAGE, from acute care, which is beds and stretchers, as well as physio, which is now encompassed under the umbrella of our emergency care business. So it was strength across the medical portfolio, and I really wouldn't call out one beyond the other. It was really very, very solid growth. We do have some new products coming to any commentary around features, benefits, or timing, but I would just put it in the bucket of tailwinds as we think about next year.

Kristen, I'd just like to add, before your follow-up, I'd just like to add that this medical business has been really a consistent and terrific performer over multiple years, and I think sometimes is not fully appreciated for its growth. I mean, we had double-digit growth organic in the U.S. last year, and we, on top of that, posted another double-digit year quarter of organic growth. So, It's stable and strong performance, terrific leadership with a long-tenured president, and the ability to sell, even if you look at physio, without the full bag of new products, driving very, very high growth. So it's really a terrific division of our company, and I expect continued very strong growth in the future.

I just wanted to follow up. I think it was a question David had asked about margins. You guys are overcoming a lot of FX headwinds this year, so I just want to get an understanding for what is allowing you to overcome these FX headwinds. Your underlying margin performance is quite impressive. Should we think about that capability of really over-delivering on the margin front as being able to carry over in absence of M&A deployment?

I think a lot of the strength of the underlying programs we have associated with CTG and driving really margin performance has certainly helped and given us some good leverage in terms of overcoming some of our FX challenges. You know, the other thing I would point to is that we did a really good job accelerating the cost synergies on K2. So early on in the year, we really sort of front-end a lot of what we thought would maybe extend out through the team really did a great job there. And then lastly, you know, I would just point out we do have a hedging program which helps offset some of our known transactional FX exposures. It looks out 18 months, and so then that's also helped mitigate it, and that would generally flow through operating expenses as well.

Your next question comes from a line of Richard Newiter with SVB Learing. Your line is open.

Hi, thanks. I have two questions. I wanted to start off first on the robotics initiatives and some of the deals that you did. Catherine, the Cardin deal, I just wanted to get a sense for, I appreciate you're not going to tell us exactly kind of what your robotics plan is and spine, but Is it right to think of Cardin and Mako that Mako is ultimately where you're going to go when you come to market with a spine robot solution? And you saw something in the Cardin IP that maybe accelerates you to getting there? Or is there potentially something that we see launched from Cardin first before we see a Mako spine-tilled robot? And then I have a follow-up. Thanks.

Yeah, Rich, I don't mean to be difficult, but as you said, we're not going to tell you exactly. I'm not going to tell you at all. So we really are going to wait on this one. It would truly be premature to get into details around this. We do think there's some complementary technology for our ultimate goal of a MAKO-defined robotic system, but it's just too early. And as you know, we really like to have a clear line of sight and an ability to articulate a value proposition and a differentiated technology. and certainty to market launch before we start talking about it. So it's just too early right now, and it's that along with some competitive reasons. We're just not going to go into any detail.

Fair enough. And just the foot and ankle and shoulder call-out, I think you said double-digit growth between foot and ankle. Check out or parse out what the two divisions were growing and anything that you'd call out that's breaking the trend in each of those respective upper and lower extremities markets. Thanks.

Yeah, so no, we're pleased with the growth. We're not going to break it out into that level of detail. I would remind you shoulder is off of a pretty low base. So to be fair, when we talk about very strong growth, that is off of a lower base. So across the board, strength and feel good that we're starting to see better momentum there.

Your next question comes from the line of Matt Taylor with UBS.

Hi, thanks for taking the question. I wanted to ask a question about the Mako dynamics because it is impressive that you're able to sell, you know, even more here as the U.S. market has relatively large install base. I guess I was wondering if you could talk about any views that you have on kind of the U.S. TAM and then some of the opportunities going forward in Japan and China that you articulated. How big could those be?

I'm sorry, so I apologize. I missed the first part of the question around the U.S., So, there's a lot of runway left here. I mean, we're thrilled with the uptake and the ever-increasing base of robots, but there's still a lot of opportunity given there's somewhere around 5,000 orthopedic hospitals in the U.S. And keep in mind, you know, we're now low double-digit penetration for hospitals that have purchased a second Mako. And so... I would view it as we've got years of runway here on the benefit features, benefits to patients, as well as the economic benefits.

And then I just had a follow-up on the trauma extremities. You partially covered this, but can you comment at all on market dynamics and foot and ankle? Do you feel like you're gaining share? And then same question in trauma. Is it more of a share gain or kind of a comeback on some of those product shortages that improve your growth rates?

Yeah, if you recall, we had some supply issues tied to some new product launches in trauma that we spoke about earlier in the year. We're seeing the benefit of starting to come out of that. And then just overall, just increased focus by the selling organizations that are helping to deliver that performance. And again, as I noted, some easier or lower revenue base on the shoulder side.

Your next question comes from the line of Kyle Rose with Canaccord Genuity. Your line is open.

Great. Thank you very much for taking the question. I've got two, one on the shoulder side and then the other on Mako. So first on shoulders, I know in the past you've talked about the success of some of the specialty sales forces. Can you just remind us how the shoulder is commercialized currently and any plans to potentially develop or carve off a specialized sales force specifically for the upper extremity side? And then with respect to Mako, I specifically wanted to talk about the emerging markets. You highlighted the training facility in China, the first procedures in Japan. I guess just help us frame the opportunity for some of these larger enabling technologies in the emerging markets and just how, if at all, the business model differs from a capital perspective.

Yeah, I'll take the second part. It's early days. I mean, we're obviously very excited to have the training facility in Hong Kong, to have the approval. in Japan for the total knee now. So I think probably a bit early to start talking about revenue expectations, but it's part of the overall strategy. We're obviously going to bring a lot of the lessons learned we have from the launch in the U.S. and obviously have the benefit of a global surgeon community to really help validate the technology. So I think there's a significant opportunity in those markets, and you can see as we're continuing to build that base of robots outside the U.S.

Just to add, I would say that Japan and China are the two, I would say, big market opportunities for Mako. There's opportunity across the world. As you can see, we have well over 100 robots placed outside the United States, and so there are many other countries. I think India will be interesting, but it's going to take longer. in India for that to play out, but Japan and China are the two priorities in the near term. On your question related to shoulder, so as you know, we launched a short stem shoulder earlier this year. We still do not have very much of a dedicated sales force. We have a very sort of small business. We're very pleased with the growth, but it's a fragmented procedural base, and we have a few dedicated sales people in India large MSAs, but don't really have the scale yet to have a fully dedicated sales force. So it is shared with our joint replacement sales force.

Your next question comes from the line of Josh Jennings with Cowan. Your line is open.

Hi, good evening. Thanks. I was hoping to start off on the transatlantic model and just you guys are having some nice success there. And so maybe some more details just in terms of the runway. And I mean, you guys have laid out that. I mean, is it really as straightforward as just deeper investments, more sales reps and introducing more products? And you guys should creep up to your U.S. share levels and in a different orthopedic segments and mid surge businesses, et cetera. And is there any NBR risk next year?

Yeah, so what I tell you is the same thing I said four years ago. When we launched the transatlantic operating model, we said we're very underpenetrated. Europe was roughly 10%, 11% of our total sales, and we had a long runway to go. And every year since then, Europe has outgrown Stryker's growth rate, and Europe had never done that prior to the change. So we're delighted with this operating model change, the way our division presidents have embraced it, the continued specialization of sales forces. We are still not as specialized in Europe as we are in the United States. We still have sales bags that are larger just because of the scale that we have in certain countries and certain geographies. I expect that specialization to continue in Europe and that we have multiple years ahead of us of continuing to grow well above the market. So we're growing higher than Stryker's growth rate, which is multiples higher than the market growth in Europe. But again, we're making up for lost time because our market shares are lower. I would dream of being able to have the same level of market shares as we have in the United States. It's going to take us time to get there, but we still have a significant runway ahead of us. And that's why I call Europe a growth engine for Stryker, both inside the company as well as outside the company.

Excellent. Just on the MDR, are you guys making progress there just in terms of the potential for a CE mark recertification?

Yeah, we're in very good conditions with our preparation. We've been working out this for multiple years. And obviously, as we started to prepare for this, there were a number of SKUs that we've decided not to register because we've discontinued them. So it enabled us to do a bit of cleanup on our SKUs in general. But we believe we're in very good shape. We've made the necessary investments. Don't perceive that being any reason to call out as a risk. for our momentum in Europe.

Your next question comes from the line of Matt O'Brien with Piper Jaffrey. Your line is open.

Afternoon. Thanks for taking the question. I'll have one question, just multi-parts, and it revolves around MACO. The domestic performance in the quarter was very strong, according to our math here, and I think the strongest you've ever seen. So first question is, did you see some delays maybe in Q2 around AAOS as people were considering different systems that were hitting the market? That's first. And then secondly, Catherine, you mentioned, you know, you're starting to see multiple system orders now, but you're in the low double-digit range. So I'm wondering if, you know, you're starting to get so much volume into some of these older facilities that they're now having to add a second or third system. And is that something that we could see an inflection in over maybe the next couple of years?

Yeah, so no to the first question. We didn't see any delay in Q2 that got pushed into Q3, and we usually have when that occurs. So that's my earlier comments. We're just continuing to build on a strategy execution that is working well. So it hasn't suddenly gone to low double digits. It's been as hospitals start to use it in more and more services, surgeons pile on, there's a capacity issue. So we've slowly seen that percent of hospitals buying a second robot building. And I think that trend will continue. It is incredibly difficult to model out. Continuing to climb. It won't be every hospital, but clearly as demand increases from other surgeons in a hospital practice.

Helpful. Thank you.

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

Thank you for joining our call. We look forward to sharing our Q4 results with you in January, at which time we will provide our 2020 guidance. Thank you.

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