Stryker Corporation

Q3 2021 Earnings Conference Call

10/28/2021

spk01: Welcome to the third quarter 2021 Stryker earnings call. My name is Maddie and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Following the conference, you will conduct a question, 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'd like to ask a question, please press star then one on your touchtone phone. This conference 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, during the discussions will include a certain non-GAAP financial measures. Re-consultations to the most directly comparable gap 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, Chairman and Chief Executive Officer. You may begin, sir.
spk02: Thank you. Welcome to Stryker's third quarter earnings call. Joining me today are Glenn Bainline, Stryker's CFO, and Preston Wells, Vice President of Investor Relations. For today's call, I will provide opening comments, followed by Preston with an update on the trends we saw during the quarter. Glenn will then provide additional details regarding our quarterly results before opening the call to Q&A. For the quarter, we posted organic sales growth of 8.4% versus 2019, driven by excellent double-digit growth from our med-surg and neurotechnology businesses. But this was offset by softer sales of hips, knees, and spine due to the resurgence of COVID-19. The slowdown in deferrable procedures primarily impacted the US and worsened through the quarter. While our implant businesses were challenged, we saw strong results for our Mako robotic technology and capital products across our med-surg portfolio. In addition, We had strong performances from our more emergent businesses, including our core trauma business and another standout performance by Neurovascular. International organic growth of 12%, again, outpaced growth in the US, representing robust performances and lessening impacts of COVID-19 across most major geographies, including strong results across Europe, Australia, Canada, and emerging markets. Our year-to-date organic growth is 7.6% and with the continued uncertainty related to COVID recovery, as well as healthcare staffing shortages, we are updating our full year organic sales growth guidance to 7-8% compared to 2019. Our capital equipment order book remains strong and we are well positioned for the eventual procedure recovery. Our adjusted EPS grew 15% versus 2019, and we continued our focus on driving cash flow, leading to a year-to-date cash conversion of 87%. The EPS growth, although solid, was lower than our expectations and is reflected in our updated guidance, which Glenn will elaborate on. Meanwhile, we are pleased with our cash flow performance, which provides us with additional flexibility for future M&A opportunities. While the quarter did not progress as we had anticipated due to the Delta variant, we remain confident in the outlook for our businesses, as evidenced by our strong international med-surg and neurotechnology performances. We expect these businesses to continue to perform at high levels, with the uncertainty most concentrated in deferrable procedures in the United States. We continue to feel bullish about our longer-term prospects as the pandemic recedes with our proven strategy and strong fundamentals. We are excited to share more with you at our upcoming analyst day on November 18th. I will now turn the call over to Preston.
spk05: Thanks, Kevin. My comments today will focus on providing additional insights into the current environment, including how certain products and geographies perform during the quarter. In addition, I will provide an update on the continued integration of Wright Medical, including the performance of our combined trauma and extremities business. During the quarter, significant spikes of the COVID Delta variant drove increased infections and hospitalizations that required higher hospital bed utilization, which ultimately led to the deferral of elective procedures. In addition to increased hospitalizations, hospital staffing shortages also pressured procedural volumes throughout the quarter. This primarily impacted our implant-related businesses, including hips, knees, and spine, which can be in many cases deferred for a period of time. However, the disease states that we treat are degenerative, and the patients that deferred their procedures will eventually return to have those procedures completed. The impact on elective procedures was more pronounced in the United States than on other geographies outside the United States. Within the United States, there were areas of disruption in most states, but disruption was more widespread in the southeast and southwest portions of the country, impacting major markets like Florida and Texas throughout the quarter. Other markets around the world, including China, Japan, and Australia, experienced intermittent lockdowns throughout the quarter, which also drove uneven results across our implant-related businesses in those markets. During the quarter, Europe, which was more impacted by COVID in previous quarters, had impressive organic growth compared to 2019. COVID-related hospitalizations in the United States began to trend upwards towards the end of July and then progressively worsened, peaking at the beginning of September. At the end of the quarter, infection and hospitalization rates were declining in impacted regions and have continued into October. As a result, we are beginning to see some improvements in our more impacted businesses through the first few weeks of October. However, we expect the recovery will be partially muted by the continued hospital staffing challenges and ongoing COVID-related volatility. Our assumption for the fourth quarter is that deferrable procedures will gradually return starting with a low base in October before returning to more normal levels by the end of the quarter. As a result, we expect that the fourth quarter growth rates for our more deferrable businesses will be similar to the third quarter. Despite the ongoing challenges with elective procedures, we had a strong performances in our more emergent businesses like neurovascular. which grew strong double digits compared to 2019 as a result of continued market expansion and ongoing global demand for our innovative technology. In addition, demand for our capital equipment remains healthy as evidenced by our continued strong sales performance and robust order book for small and large capital products, including our surgical technologies, emergency care, and neurosurgical businesses. The ongoing strength in capital is also reflected in the continued demand for our Mako robotic technology. Our industry-leading Mako robot continues to help surgeons improve patient outcomes by knowing more and cutting less. This trend across capital is expected to continue as hospitals take advantage of flexible financing and prioritize capital products like those within our portfolio that are critical to providing emergency care, driving profitable procedures, and ensuring safe working environments for caregivers and patients. turning to the right medical integration, which continues to progress in all regions and functions. The United States commercial integration has moved past the Salesforce realignment and is now focused on continued business process improvement and system efficiencies. The teams have also developed long-term product pipeline strategies. Outside the United States, we continue to work through integration activities, including Salesforce and indirect channel alignment across all key geographic regions. Overall, we remain pleased with the progress and the pace of integration over the past year. Including Wright Medical, the combined US trauma and extremities business has grown 8.1% year to date. The year to date growth in the United States has been driven by strong double digit growth in both our core trauma and upper extremities businesses, reflecting the execution of the sales integration in the United States. Outside the United States, sales have declined 3.8% year to date driven by timing of distributor conversions in Latin America and Asia Pacific, and declines in our legacy trust and trauma business in China as a result of the provincial tendering process. Considering the latest results, ongoing COVID-related volatility, and the provincial tenders in China, we now expect our combined trauma and extremities business to grow mid-single digits for the full year. With that, I will now turn the call over to Glenn.
spk15: Thanks Preston. 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. As a reminder, we are providing our comments in comparison to 2019 as it is a more normal baseline given the variability throughout 2020. Our organic sales growth was 8.4% in the quarter. The third quarter included the same number of average selling days as Q3 2019 and Q3 2020. Compared to 2019, the two-year impact from pricing in the quarter was unfavorable 2.2%. Versus Q3 2020, pricing was 0.7% unfavorable. Foreign currency had a favorable 1.2% impact on sales. Our med-surg and neurotech businesses saw another very strong quarter, continuing the growth momentum of the second quarter with double-digit growth in both segments. Our orthopedics and spine businesses have been adversely impacted by increases in hospitalization rates starting in early August, especially in the U.S., as a result of the Delta variant. The corresponding impact on elective procedures has significantly slowed the recovery in our orthopedics and spine implant businesses. For the quarter, U.S. organic sales increased 7.1%, reflecting the continued strong demand for Mako, instruments, medical, and neurovascular products. International organic sales showed strong growth of 12%, impacted by positive sales momentum in Europe, Australia, Canada, and emerging markets. Our adjusted quarterly EPS of $2.20 increased 15.2% from 2019, reflecting sales growth, gross margin expansion, and a lower quarterly effective tax rate, partially offset by the impact of business mix and higher interest charges resulting from the right acquisition. Our third quarter EPS was positively impacted from foreign currency by 4 cents. Now I will provide some highlights around our segment performance. Orthopedics had constant currency sales growth of 19.9% and organic sales growth of 2%, including organic growth of 1% in the U.S. This reflects the impact of the slowdown in elective procedures as a result of the Delta variant, which primarily impacted our hip and knee implant businesses. Our knee business grew 0.9% organically in the U.S., reflecting the previously mentioned impact on elective procedures, offset by continued adoption of our robotic platform for total knee procedures. Our U.S. trauma business grew 8.8%, reflecting solid performances across the portfolio. Other ortho grew 19.8% in the U.S., primarily reflecting demand for our Mako robotic platform, partially offset by declines in bone cement. Internationally, orthopedics grew 4.1% organically, which reflects the strong performances in Europe and the momentum in MAKO internationally, somewhat offset by the increased impact of restrictions imposed on elective procedures due to COVID, especially in Japan. For the quarter, our trauma and extremities business, which includes Wright Medical, delivered 3.2% growth on a comparable basis. In the U.S., comparable growth was 7.4%. which included double-digit growth in our upper extremities business. In the quarter, MedSearch had constant currency and organic sales growth of 12%, which included 12% U.S. organic growth as well. Instruments had U.S. organic sales growth of 15.9%, led by double-digit growth in their orthopedic implants and surgical technology businesses, which include power tools, waste management, smoke evacuation, and skin closure products. Endoscopy had U.S. organic sales growth of 10.6%, reflecting strong performances across their portfolio, including video and general surgery products, and strong double-digit growth of their communications and sports medicine businesses. The medical division had U.S. organic growth of 12.5%, reflecting double-digit performances in its emergency care and SAGE businesses. Internationally, MedSurg had organic sales growth of 12%, reflecting strong growth in the endoscopy, instruments, and medical businesses across Europe and Australia. Neurotechnology and spine had organic growth of 11.8%. This growth reflects double-digit performances in our neurovascular, neurosurgical, and interventional spine businesses. Our neurovascular business had particularly strong growth of approximately 26% and makes up roughly 30% of this segment. Our U.S. neurotech business posted an organic growth of 11.8%, reflecting strong product growth in Sonopet IQ, bipolar forceps, and bone mils. Our U.S. neurovascular business had significant growth in all categories of products, including hemorrhagic, flow diversion, and ischemic. Internationally, neurotechnology and spine had organic growth of 24.6%. This performance was driven by strong neurotech demand in China and other emerging markets, as well as Europe and Australia. Now I will focus on operating highlights in the third quarter. Our adjusted gross margin of 66.3% was favorable approximately 55 basis points from third quarter 2019. Compared to the third quarter in 2019, gross margin was primarily impacted by acquisitions, which was partially offset by business mix and price. Adjusted R&D spending was 6.7% of sales, reflecting our continued focus on innovation. Our SG&A was 34.1% of sales, which was slightly negative as compared to the third quarter of 2019. This reflects continued cost discipline and fixed cost leverage, offset by ramping of certain expenses, hiring to support future growth, and the dilutive impact of the Wright Medical acquisition. In summary, for the quarter, our adjusted operating margin was 25.4% of sales, which is approximately the same as third quarter 2019. This performance primarily resulted from our positive sales momentum offset by the dilutive impact of acquisitions, primarily Wright Medical. Related to other income and expenses compared to the third quarter in 2019, we saw a decline in investment income earned on deposits, and interest expense increases related to our debt outstanding for the funding of the right medical acquisition. Our third quarter had an adjusted effective tax rate of 14%, which was impacted by our mix of U.S., non-U.S. income and favorable discrete items during the quarter. Our year-to-date effective tax rate is 14.8%. For the year, we continue to expect an adjusted effective tax rate of 15% to 15.5%. Focusing on the balance sheet, we ended the third quarter with $2.6 billion of cash and marketable securities and total debt of $12.7 billion. Year to date, we have paid down $1.2 billion of debt. In October, we completed the refinancing of our revolving credit facility and increased that facility from $1.5 billion to $2.25 billion. Turning to cash flow, our year-to-date cash from operations was approximately $2.3 billion. This performance reflects the results of earnings and continued focus on working capital management. Based on our performance in the third quarter, the continued volatility experienced as a result of COVID, procedural delays and hospital staffing shortages, as well as uncertainty around the pace of recovery in the fourth quarter, we expect 2021 organic net sales growth to be in the range of 7% to 8%. As it relates to sales expectations for Wright Medical, we now expect comparable growth for trauma extremities to be in the mid single digits for the full year when compared to the combined results for 2019. If foreign currency exchange rates hold near current levels, we expect net sales in the full year will be positively impacted by approximately 1%. Adjusted net earnings per diluted share will be positively impacted by approximately 5 to 10 cents in the full year. and this is included in our revised guidance range. Based on our performance in the first nine months and including consideration of the aforementioned volatility impacting the recovery of elective procedures and the full year right medical impact, we now expect adjusted net earnings per diluted share to be in the range of $9.08 to $9.15. And now I will open the call for Q&A.
spk01: Thank you. We will now begin the question and answer session. If you have a question, you will need to press star 1 on your telephone. If you wish to remove from the queue, press the pound key. As a reminder, callers will be limited to one question and one follow-up question. And your first question comes from the line of Robbie Marcus with JPMorgan.
spk09: Oh, great. Thanks for taking the questions. Maybe to start on guidance. You know, it sounds like October is off to a slower start. Maybe just if you could walk us through, you know, the different business lines and how you're seeing them throughout fourth quarter so far and what gives you confidence that you can start to see a pickup. Do you have, you know, are orders increasing? Are doctors increasing bookings? Just help us understand what gives you confidence for the pickup.
spk05: Hey, Robbie, it's Preston. So in terms of Q4, and as I mentioned in my prepared remarks, we saw October starting to show some improvement as it relates to our implant-related businesses. And so we are seeing a bit of a pickup, but I think it's important to note that it's starting from a lower starting point. So while we do expect there to be some recovery happening in those implant businesses throughout the quarter, we do expect it to get back to more normal levels by the end. There are a few headwinds that are out there as well in terms of not only additional COVID hotspots or things like that, but also with staffing being a potential headwind as well. So we're definitely monitoring those as we go, but we are seeing some improvement early in October versus where we ended in Q3. As it relates to the other parts of the business, as both Kevin, Glenn, and myself mentioned, our capital business continues to perform very well, and we still have high expectations that those are going to continue Into Q4, really, and the way we look at that is just continuing to look at the order book as we ended the quarter and how that continues to progress in terms of growth. Same thing as we think about those more emergent businesses, whether it's trauma or neurovascular. Again, those businesses are continuing to perform very well, and there's no reason to believe that they're going to slow down as we think about Q4. So hopefully that helps for you.
spk09: Yeah, and maybe one more just to dive in a little deeper on the trauma and extremities You know, you talked about double-digit growth within shoulder, but that was probably the biggest miss of any business versus the street. So I was hoping you could give a little more detail there. It was lower, really slow. It doesn't sound like it's anything from the integration. So just hoping to get more color. Thanks.
spk05: Yeah, no, I think it's important to understand that on those parts of the business, like extremities, like shoulder, like foot and ankle, they are subject to some of the elective procedure slowdown as well. So while they did see some of that impact, we're still really happy with how they've performed. I mean, they really are still growing. The integration is going well. And as I mentioned, there's a, in terms of the international piece, there's a little bit slower pickup there on some of the international businesses as we go through the transition and integration in those parts of the business.
spk09: Great. Thanks a lot.
spk01: The next question comes from the line of Matt Mixick. Matt Mixick, your line is open.
spk06: Hi. Thanks for taking the questions. So I had maybe a first thing I guess I would say is at this point I don't think your comments on COVID-related pressure and staffing challenges will come as much of a surprise to many folks who are sort of tracking this into the print and looking at the Q4. But I did have a couple of questions on Yeah, some aspects of your business, one sort of COVID-related and sort of related to one of your sort of strategic initiatives around ASCs. If you could talk maybe a little bit about, you know, the activity that you're seeing there, what kinds of changes you've made to your organization, you know, what kinds of shifts and volumes you've seen and how you think that may affect sort of the intermediate term for those businesses. And I have one follow-up.
spk02: This is Kevin and we're continuing to see a shift to the ASC the challenge we have right now is just the pace so the capacity takes time to build and every hospital system is in the process of trying to increase their capacity so it is improving and certainly that'll be a trend that was that had started prior to the pandemic and and is continuing we feel very good about our position in the ASC it's way ahead of our expectations frankly going into the pandemic One measure that we look at is our sports medicine business, and that performed in the United States was north of 20% growth in Q3. So we're seeing strength, but the challenge on the hip and knee side of it is just time to build capacity. So it's growing, but it's going to just take time before it becomes a really, really meaningful part of our business. But we believe we're extremely well positioned, both with MAKO and even without MAKO, with our portfolio overall. everything that they need for an ASC.
spk06: That's helpful. And then my follow-up is just on maybe trying to look past the pressure that I think many folks are reporting this earnings cycle, similar to what you're describing, and into sort of next year. And I'm not sort of about to try to pry guidance out of you or anything like that for 2022, but You know, one of the things that we hear often from your businesses and across the board is this sort of demand for capital equipment. If we look at, you know, challenges and procedures and staffing issues, and then on the other hand, hospitals apparently, you know, investing fairly heavily in their capital equipment and infrastructure around robotic surgery, etc., And I just, you know, would love to hear your thoughts on, you know, if you see a relationship that's been in the past, a relationship to the, you know, between capital and your procedural businesses and, and what that sort of tells you about the next 12 to 18 months, uh, on the back of this demand. Thanks.
spk02: Well, I think the capital strength is really given the liquidity of hospitals. So hospitals, even though they're struggling through the pandemic, their liquidity is very good, partially due to the CARES funding that was put in place. They're in a strong position, and they are getting ready for the future. As we talked about on the last question about ASCs and construction of ASCs and investments in hospitals, the demand for technology is very strong. Our order book for capital is very strong. In fact, in Q3, there was actually even some slight delays of some of the capital. There were some challenges of actually having staff to receive some of the capital equipment and put it in place. But I would say I'm feeling very bullish and that capital cycle should continue, speaking in the United States, through all of next year. As it relates to the deferrable procedures, hips, knees, spine, those represent for Stryker a little less than 30% of our sales. And those are the ones that are most impacted. They will come back. And frankly, I'm excited about certainly hip and knee where the MAKO volume continues to grow. And when those procedures come back, we're in terrific position to capitalize on those because the MAKO procedures we're putting in, roughly half of those are going into competitive accounts. And so when volumes come back, we will be able to really take advantage of that, not just in our own striker-friendly accounts, but even in competitive accounts.
spk01: Your next question comes from the line of Anthony Petrone with Jefferies.
spk14: Hi, thank you for taking the questions. A couple on just attempting to quantify the backlog specifically in ortho recon heading into 2022 as we navigate the current Delta spike and maybe extending that to capital. Are you actually seeing some level of pent up demand for Mako? And maybe just to sneak a quick one in there, maybe just some high level comments on supply chain pressures that we're hearing across obviously this space and others. Is that a potential headwind to the capital business specifically as we head into 2022? Thank you.
spk05: Perfect. So let me see if I can address those different parts. So in terms of the backlog itself, and so just starting with the implant-related backlog, I mean, obviously the last 18 months has not been normal from a volume perspective. And so while we've had some good quarters and some slower quarters, you know, that backlog has continued to exist. And in some cases, like this quarter, it's continued to build And so it's hard to say exactly what it is because there's just so much variability that's happening across different regions. So if we look at this past quarter, obviously the U.S. was more impacted than other areas. But it's safe to say that the backlog still exists. And as we think about what's going to happen with that, we think that over time, as we get back to more normal levels, that backlog will begin to work down. And so you'll see some improvement in terms of growth rates over time. It'll be sustained. You won't really see a big large outsized growth rate that will happen in any one particular quarter with regard to the backlog. As we think about capital, I mean, there are areas for sure that there's been some pent-up demand as some of the uncertainty has just existed out there in terms of some of the hospital systems. But, you know, we're still seeing very strong demand for our products. Like we've talked about before, the order book remains really, really strong. and it continues to grow as well as sales. So we feel very bullish, as Kevin said, with regards to how we think about capital as we go forward into 2022. With regards to the impacts from a raw material or supply chain perspective, what I would tell you is there certainly are challenges, just like everybody else has, with regards to whether it's the tight labor market or shortages in things like electronics or resins. But as of now, we've been able to really effectively meet all of our customer needs. And And so what that really has required is that our supply chain has really had to be much more active in its support and in its partnership with the various supplier base that we have. And so we've been able to really make sure that we're maintaining our safety stock levels. We're really able to actively purchase critical components where necessary so that we can keep production going. And then also just around logistics and distribution as well and working actively with those partners. All of that in anticipation of the fact that we think that there's going to continue to be some headwinds in this area. And so as a result, we have seen some increased costs as well in terms of inflation on those items. But to date, our supply chain and procurement teams have really just been able to manage that. And so we haven't seen anything really show up in terms of any major impacts on our financials. And so while we expect that to continue into the rest of 21 and into 2022 as well, We want to make sure that whatever we have in our numbers has already been factored in some of those raw material challenges that we have, and we're going to just continue to monitor the situation as it progresses.
spk14: Thank you so much.
spk01: The next question comes from Matt Taylor from UBS.
spk07: Hey, everyone. This is Yong Lee in for Matt. Thanks so much for taking our questions. I guess I was wondering if you can share a little bit more color on the strength you're seeing in MAKO, both in the U.S. and OUS. How do you think it's positioned relative to the competition now that there's more entrance in the space? And can you also touch upon the MAKO shoulder program? What should we expect in terms of the target that you are looking at and any updates on timeline?
spk02: So the MAKO business momentum continues and has been strong throughout the pandemic. So in spite of the procedural slowdowns, we're seeing strong demand for our system. We clearly have the leading system on the market with a big head start versus the competition. And frankly, the competition has actually raised the water level of robotics and raised the importance of robotics. So we love our position, and we believe that it's just going to increase the demand for Mako. More and more systems are ordering their second and third and fourth Mako. So we know we have a winning solution for customers. We're very excited, frankly, with our HIP software and our new HIP application. which has now penetrated in all of our MAKO accounts, and we're seeing a nice uptick. Even though the overall volumes are down because of COVID, we are seeing a nice uptick in the hip adoption, given the new software, which makes it easier to do the procedure. So we feel like we're in a very good position, and the fact that there's more competitors to the space just validates the importance of orthopedics, and we like our chances. As it relates to the shoulder program, we do have an active program. We're not in a position right now to talk about timelines or dates for that. But as you saw with our results in Q3, our shoulder business is doing very well, even before we have a solution with makeup.
spk07: Okay, great. I appreciate the color there. I guess maybe to follow up, I was wondering if you can talk about the M&A program landscape? How actively are you looking at deals? What do you think about current valuations right now?
spk02: We are always actively looking at deals at Stryker. Even after the Wright Medical deal, as you saw, we've done a couple of smaller deals with OrthoSensor and Goss Surgical. Because of the debt that we've had to pay down, we've been focused more on tuck-ins, but I'm really delighted with the cash flow performance that we've had. both last year as well as the first nine months of this year. So now we can start to look at, let's say, slightly larger tuck-ins while we continue to pay down the debt. Valuations are very high overall, but there's still a lot of targets, and we feel pretty confident that we'll be able to continue to run our M&A in offense and find value-creating acquisitions for Stryker.
spk01: And just a quick reminder, to ask a question, you will need to press star 1 on your telephone, and if you wish to be removed from the queue, press the pound key. Your next question comes from the line of Matt O'Brien with Piper Sandler.
spk03: Hi, guys. This is Jeron for Matt. Thank you for taking the questions. I just was wondering if you could talk about MAKO in China and Japan. You know, Asia's been a bright spot in some areas and a mixed bag in others for MAKO. you know, a handful of companies that have reported so far. So, you know, just wondering how you would characterize that rollout in each of those geographies.
spk05: Yeah, so I would just say that in terms of Mako, as we think about outside the United States, we're really pleased with how that's progressing, and we're seeing good growth, really, in all markets outside the U.S. As we think about Japan, for example, we know that the business continues to progress well, and The number of installs in Japan is increasing month over month. So we're really happy with how the technology has been received and the feedback that we're getting. And the number of procedures that are being done on MAKO in Japan continue to increase as well. As far as China is concerned, it's much earlier days in China from a MAKO standpoint, but the momentum is really building there. We're still working through the impacts of the volume-based procurement activity. But we do expect Mako to be a key technology and a key role for us or play a key role for us as we think about our rebound business in China going forward.
spk03: Okay. Thanks for that. And then just a quick follow-up here on the neurovascular side. You know, the performance has been really, really strong the last couple of quarters. You know, so maybe you can kind of give us a sense for, you know, what you think the market growth rate looks like there and then just you know, a sense for what's driving your portfolio products to really take share compared to quarters in the past. Thank you.
spk05: Yeah. So, so in terms of neurovascular, obviously it's a, it's a very hot market and, and, uh, but, but also when you look at our results with regards to that market, you're seeing a couple of things happen. You're seeing really the, the impact of the technologies that we've been able to introduce over the past, really 12 to 18 months and, and taking advantage of, of really, uh, a product super cycle really from our neurovascular team where we're expanding into some different areas. And then also we're seeing the market expand. So if you think about places like China, for example, we're seeing market expansion happen there. So our results are really a result of both of those items.
spk01: Your next question comes from the line of Vijay Kumar with Evercore ISI.
spk12: Hey, guys. Thanks for taking my question. one on the big picture and one on the finance side. Starting with the big picture, Kevin, it seems like there's a tale of two cities in device land. Some of your peers have assumed Q4 sort of normalizing on the procedure side. Other companies certainly have called out Q4 being in line with 3Q levels and things worsening, or perhaps being similar to September trends. Is this a regional impact or is this an ortho versus other parts of the wasteland? Maybe just put things into perspective on why we're seeing diversions. What are you assuming for the Q4 recovery?
spk02: As Preston mentioned, the Q4, we're assuming a similar growth rate as we saw in Q3. So versus 2019, we're expecting a similar kind of growth rate. Obviously, sequentially, we'll have improvement because Q4 is a larger quarter than Q3, but year over year, we're expecting a similar growth rate. Related to that question, I would say that it's really ortho and spine related. That's the bigger factor. So we have products that are used in general surgery in our endoscopy division and smoke evacuation, and we're not seeing the same kind of fall off in those areas as we're seeing in hips, knees, spine. So I do believe it's mostly procedure related, which creates the difference that you're describing between us and some of the other med tech companies. There's also regional. Stryker, of course, has a very strong presence in the United States. And so that regional impact, you even saw that with our own implant businesses, that we had a more negative impact in the United States than we did in international. And so that's the secondary factor. But I would say the primary factor for what you're seeing versus other companies is
spk12: is that these procedures hip knee spine are more deferable than some of the other procedures and some of our other med tech peers that's helpful perspective and one on uh finance glenn free cash conversion year to date uh we're running pretty close to 90 percent has something changed here uh i know uh you know people used to ask on free cash conversion but this review And the execution here, despite some choppiness on the pandemic side, the margin execution, free cash execution here seems to be stellar. So I'm curious, has anything changed for you guys on the free cash side?
spk15: Yeah, Vijay, you're right. Free cash flow of almost 2.1 billion year-to-date and 87% conversion ratio. A lot of it has to do with several factors. We've been sort of priming the organization to really start focusing and delivering on cash flow. I think as we entered into COVID, it was a real alarm bell for, hey, let's really start focusing on this so that we can sort of keep active in M&A, we can pay down debt, we can meet a lot of the sort of goals that we wanted to meet. So I think We're feeling a little bit of that. You look at performance on AR. We've started to move a lot of our AR into shared service centers, and so we're getting better on process. If you look at AP, we have a large initiative that's being driven by our GQO organization in terms of working with vendors and being smart about what our AP terms can be and should be. And then all of our divisions are very focused on inventory management and just being smarter about what are the safety stock levels that you really need and what don't you need and how can we make sure that we're having the right inventory at the right time when we need it. And then I think the other thing that we're feeling a little bit is, you know, we have been fairly controlled and prudent as we look at allocating dollars to capital expenditures. And as you look at our right medical integration, we've really been focused on that spend as well and are running probably a little ahead of where our goals were on that. So I really do think that it's a muscle that the organization has really learned and has grown over the past two years. And it's something that I feel pretty strongly about, you know, we'll be able to continue from here on out.
spk01: Your next question comes from the line of Josh Jenning with Cohen.
spk10: Good afternoon. Thanks for taking the questions. This is a question on staffing shortages and maybe a little bit grand. I've been just thinking about the different settings of care and staff shortages in hospitals. I think it's clear. But I was wondering about ASCs. Is there a different dynamic in play at ASCs? And if this staffing shortage headwind persists in the 2022, do you think we could see even stronger migration trends of surgeries into the ASCs, particularly in ortho?
spk05: Yeah, Josh, you know, in terms of staffing shortages, I mean, we're seeing it really holistically. I mean, I think it certainly is playing itself out more so in the hospital setting because obviously there's a lot more fatigue that's been there. There's COVID that still exists in the hospital setting. So, you know, I think that it certainly is playing out a bit more in the hospital setting, and we haven't, we've still seen our procedural volumes in the ASC continue to go, and certainly have not been as impacted as those in the hospital. How that continues and how that impacts the shift, I think, is still, you know, really anybody's guess. I mean, we certainly will continue to expect to see products and procedures shipping to the ASC anyway, because that's that trend that's already started and certainly accelerated over the last 18 months. So I think that's going to continue to happen. The staffing shortage is something that I think we're going to live with for a little bit as well. And so we'll continue to work through those challenges in the next year also.
spk10: Thanks, Preston. That's helpful. I want to just have a follow-up on Reddit. I know you reiterated multiple times on this call just how integration is progressing nicely and you're optimistic about the combined businesses and trauma extremities. But you've had to work through some of the synergies associated with integration and the pandemic hit wins. The November close is coming up, but as we get into normalized periods, should we be thinking about the trauma experience as accretive to corporate-wide organic revenue growth as that integration first year is complete and hopefully we get into normalized periods in 2022? Thanks a lot.
spk02: This is Kevin. I would say that I'm absolutely bullish about the right medical integration. It's been fantastic in the United States. As Preston mentioned, we still have work to do outside the United States. The timing's a little bit later with some of the conversions of our distributors. So we're still working through OUS. But in the U.S., very bullish about core trauma, upper extremities, and lower. Now, lower, of course, has been impacted somewhat by the deferral of procedures because they're more elective, a lot of the foot and ankle procedures. But love the leadership team that we have in place. Love the pipeline that we have in place. and really believe that the entire business of trauma extremities will be accretive to overall Stryker. As you know, extremities is probably the fastest growing space within orthopedics, and we have a fantastic portfolio, a combined portfolio on both upper and lower extremities. But I think one of the side benefits of the right medical integration has been for us to also have a dedicated business just on trauma. So three dedicated businesses, three terrific leaders of all businesses, and great leadership teams, and so... We're seeing that, frankly, as you saw with the U.S. number on a combined basis being over 8% is really a terrific performance in spite of a slowdown in the foot and ankle space. The overall business is performing very well, and I do expect in 2022 and beyond that it will be accretive to Strikers' overall growth rate.
spk00: Your next question comes from the line of Larry Beagleson with Wells Fargo.
spk04: Hey, guys, thanks for taking the question. Two for me. One, you have an analyst meeting coming up in a few weeks. Could you guys give us a preview of what to expect? Are you going to give us long-term financial goals? And I have one follow-up.
spk05: Hey, Larry, it's Preston. Yeah, we're really going to talk about all the growth drivers that make Stryker special as we think about emerging from the pandemic. and all the different things that are going to help our business continue to grow into the future for sure. The long-term financial goals will definitely be part of that.
spk04: That's helpful. And, you know, I know you're not going to talk specific guidance about next year, but, you know, Kevin or Glenn, you know, how are you feeling about, you know, continuing to deliver top tier, you know, revenue growth and the 30 to 50 basis points of, you know, leverage that you guys target? How are you feeling about that with the inflation headwinds that we're all paying close attention to? Thanks for taking the questions.
spk02: Sure. On the first question, as you've seen over the last nine years and fully expect into the future, that we will have organic sales growth at the high end of MedTech. Clearly, COVID has put a crimp in that in hips, knees and spine. But other than that, you're seeing that in all the rest of our businesses. And as the recovery happens, you should fully expect that will continue to be a top-tier grower. As it relates to margins, Glenn, do you want to?
spk15: Yeah, as I look at, you know, op margin, you know, first of all, if I even just look at this quarter and given the impact of COVID, given the dilution from Wright Medical, I mean, we're pretty happy that our op margin is pretty much flat with 2019. So that's a good performance. You know, again, We did not contemplate the impacts we're feeling from COVID in op margin guidance. And so we'll talk about more at the analyst meeting sort of what we think that means. But what I will tell you is we have every intention to drive that goal once we exit the impacts of COVID. So the organization will not back away from that. And we'll, even during COVID, we're very mindful of our, you know, discipline around spending and how important that is. So, you know, we'll expect to see some increases in spending probably in Q4. And those will set us up to grow in 2022. So we really will allow sort of spending around some of those Salesforce hiring and marketing initiatives to occur. But as far as it relates to 30 to 50 basis points, Beyond what we feel in COVID, we will not back away from that goal.
spk01: All right. If you'd like to ask a question, you will need to press star one on your telephone. If you wish to be removed from the queue, press the pound key. The next question comes from the line of Steve Lickman from Oppenheimer.
spk13: Hi, this is David on for Steve. Thanks for taking our questions. I was just wondering if you could maybe talk about what you're seeing currently in terms of the China tenders and volume-based procurement, and what are your expectations for the impact of that next year?
spk05: So I guess, first of all, when we start thinking about our business and we think about China and we think about the products and services that are impacted by the volume-based tendering, if we think about JR, Trauma, and Spine, those sales really that are exposed to the tendering process are less than 1% of the total Stryker revenue. So it's a very small overall impact as we think about for Stryker. But I guess just focusing on the tender itself, in mid-September, as everybody knows, the bidding was done for the national tender around joint replacements. Our bids were certainly competitive, and we secured a position for both hips and knees for our business. Overall, as everybody also knows, about 80% price reduction from the end market sale is going to be taking place across the entire industry. And so certainly that has an impact on us as we think about going forward, but there's a lot of work still left to be done in terms of how that's going to actually be executed. So we're staying vigilant with the teams in China to try to understand how that's going to roll out. It's expected to roll out, I think, in the first quarter of next year. And so it'll remain dynamic until we really understand how it's going to execute. In terms of 22, we're not giving guidance at this point in time, and it'll certainly be factored in as we give guidance in our fourth quarter earnings call.
spk13: Okay, great. Appreciate all the color. Just one follow-up. What are your latest thoughts on the smart implants and what's your outlook for this market now having orthosensor under your umbrella for several quarters? Thanks.
spk05: Yeah, so with smart implants, I mean, like we've said in the past, we think that there's a role that smart implants are going to play with regards to orthopedics going forward. But there's still a lot of work to be done in terms of understanding how that's going to be integrated from an implant and then understanding how that's going to play out from a monitoring standpoint going forward. So I would say it's still early in the process. You know, we're happy to have OrthoSensor under the Stryker name and certainly the expertise that they bring into sensor technology. And so looking forward to updating you as we develop more around that product in the future.
spk13: Okay, cool. Thank you.
spk01: Your next question comes from the line of Ryan Zimmerman with BTIG.
spk11: Thanks for taking the question. So I just want to ask specifically, you know, based on the organic growth guidance of 78 percent versus 19 and kind of where consensus is landing, obviously there's a delta there. And you've already, you know, it's clear obviously around the elective areas, you know, in terms of the impact in the fourth quarter and kind of what you're guiding to. I guess I'm just curious, Kevin or Preston, if there's anything to call particularly within the med surge areas, from a headwind standpoint that you, you know, caution us about, just because the Delta versus the street is somewhat meaningful as we think about our models. And so, you know, I just want to make sure that we're not, you know, skipping over any impact that you could be, you know, have us contemplate within that.
spk02: Just to reiterate what I said in my opening comments, we expect very high performance from med-surgeon neurotechnology. So we expect them to perform very similarly. It may not be some puts and takes between the businesses a little bit, but overall you should expect similar growth out of med-surg and neurotechnology in the Q4 as you saw in Q3. So the delta versus the street is clearly in the hip, knee, and spine area. That's the area that's had the biggest impact from COVID. And what we're calling in our guidance is for a similar quarter in Q4 as Q3. Now, obviously, We don't have a lot of visibility. It's an uncertain environment. Hopefully, the recovery will be better than what we're calling, but that's the visibility that we have thus far. And as you saw, this quarter surprised us, Q3, and we're being cautious as we give our guidance for Q4.
spk11: Totally fair. Appreciate that, Kevin. And then just to follow up, you have a new hip stem coming out. You've got the software now, I think, on the entire fleet of Makos. And so... You know, I'd love to understand just kind of your expectation and what that can do for you, particularly within direct anteriors that, you know, J&J has been so dominant in for some time.
spk02: We're really excited about the new stem. The procedures are being launched this quarter, early launch, I'd call it, this quarter. And we're building up towards a full launch of the hip stem at the AOS meeting, which is toward the end of the first quarter. So it'll be a bit of a slow build, but we're really excited. And that stem, we will marry that stem up with Mako. So that's one of the things. We still have to do that. But I would say you'll start to see pretty meaningful impact probably by the end of the second quarter, beginning of the third quarter. You'll start to see meaningful impact. But this is a product gap that we've had for some time. Very excited about the position that we're in. We're building the product right now. surgeons who have seen the product are very excited about it. So we do believe it's what we've needed, frankly, within our hip portfolio, and you'll start to see that again. You won't see a lot. You won't see anything really in the fourth quarter, and you won't see much in the first quarter, but it'll start to have an impact in the second quarter and definitely in the back half of next year.
spk01: If you'd like to ask a question, simply press star 1 on your telephone. If you wish to be removed from the queue, press the pound key. Again, that is star 1. There are no further questions at this time. I will now turn the conference over to Mr. Kevin Lobo for any closing remarks.
spk02: So thank you all for joining our call, and we hope that you can all join us in person. on November 18th for our 2021 analyst meeting and product fair with our broader leadership team. Thank you.
spk01: Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now
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