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spk00: Welcome to the fourth quarter and full year 2022 Stryker earnings call. My name is Tamia 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. This conference call is being recorded for replay purposes. Before we begin, I would like to remind you that the discussions during this conference call will include forward looking statements, factors that could cause actual results to differ materially, are discussed in the company's most recent filings with the SEC. Also, the discussions will include certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release that is an exhibit to Stryker's current report on Form 8-K filed today with the SEC. I will now turn the call over to Mr. Kevin Lobo, Chair and Chief Executive Officer. You may proceed, sir.
spk02: Welcome to Stryker's fourth quarter earnings call. Joining me today are Glen Bainline, Stryker CFO, and Jason Beach, Vice President of Investor Relations. For today's call, I'll provide opening comments, followed by Jason with the trends we saw during the quarter, MACO performance insights, and updates on Vocera and Wright Medical. Glen will then provide additional details regarding our quarterly results and 2023 guidance before we open the call to Q&A. I will begin with the macroeconomic environment. 2022 was a year where we, alongside many companies, faced unprecedented supply chain challenges and inflationary pressures. We faced these challenges and delivered for over 130 million patients and for our customers all over the world. We also remained focused on the future as we progressed our pipeline of innovation, enabling a super cycle of new product launches across our portfolio in 2023 and 2024. I want to thank our 50,000 employees for their unrelenting determination and agility. In the fourth quarter, we delivered organic sales growth of 13.2%, which brought our full year organic sales growth to 9.7%. During my 10 plus years in this role, these were record quarterly and annual growth rates. The growth was balanced across our businesses and regions in implants, disposables, and capital equipment, and was highlighted by our medical division, which had Q4 organic sales growth of over 25%. Additionally, for the fifth consecutive year, our international organic growth rate exceeded our US growth rate, demonstrating the progress we are making on globalization. This was highlighted by Europe, Canada, Australia, and emerging markets, which all posted double-digit growth in the quarter. International growth remains a significant opportunity in the years ahead and should continue to complement our strong U.S. business. Next, we delivered quarterly and full-year adjusted EPS of $3 and $9.34, respectively, exceeding our latest guidance range. This was driven by our strong sales performance, which offset inflationary pressures and negative foreign currency. Also, we are progressing with our actions to address higher costs, which include both pricing and targeted restructuring plans. We have begun to see the impact of these initiatives and expect an improving trend over the course of 2023. We also expect the positive trends in procedural recovery to continue alongside strong demand for capital products. And while component availability will continue to be variable in 2023, we do expect that it will gradually improve throughout the year, lessening the need for spot buys. We will remain disciplined with our spend and will continue to invest in innovation, including potential tuck-in M&A. We remain confident in the outlook of our business and expect to continue to deliver sales growth at the high end of MedTech, which is reflected in our full year 2023 guidance of organic sales growth of 7% to 8.5%. This growth, combined with the continued challenging macroeconomic environment, our pricing and cost actions, will translate to an adjusted EPS of $9.85 to $10.15 per share. I will now turn the call over to Jason.
spk03: Thanks, Kevin. My comments today will focus on providing an update on the current environment as well as MAKO, Vocera, and Wright Medical. Procedural volumes continue to recover throughout the fourth quarter in most countries. Parts of Asia Pacific, however, have continued to be more volatile due to ongoing COVID-related impacts. While volumes are recovering, hospital staffing pressures have continued in pockets around the globe and patient backlog remains. As mentioned on the Q3 call, these challenges will likely resolve gradually and we continue to expect this will be a moderate tailwind as we move through 2023. Additionally, demand for our capital products remain very healthy in the quarter as seen from the double digit organic growth of our medical, endoscopy, and instruments divisions. Even considering our finish, we exited the year with a very strong order book. Next, specific to Mako, we had a record quarter of installations in both the U.S. and internationally. We continue to be agnostic to the form these deals take and will continue to offer flexible options for our customers to acquire capital equipment. The great progress of our Mako offense has resulted in strong growth of our installed base alongside continued increases in utilization. In the U.S., we saw approximately 55% of knees and almost 30% of hips performed using MAKO in a quarter. Also, in December, we surpassed our 1 millionth cementless knee procedure with cementless knees continuing to index higher in MAKO accounts. So, in addition to being the leader in robotic-assisted surgery, we are also well ahead on cementless knee adoption. Finally, we are making good progress with the development of our Mako spine and shoulder applications and expect to have the initial launch of spine in the back half of 2024 and the initial shoulder launch at the end of 2024. Now to our key acquisition and integration activities. Our Vocera integration continues to progress well, and as a reminder, will anniversary in February of this year. Q4 results were consistent with our commentary on the last earnings call, as is the expected sales ramp beginning in Q2 of this year. Turning the page to Wright Medical, we've now passed the two-year mark of the integration of Wright Medical. This has been our largest acquisition to date. Now complete, we have exceeded expectations on both our sales and synergy assumptions as the cultural fit was strong and we implemented our integration playbook very effectively. Additionally, it was the catalyst that drove the creation of three separate business units, allowing us to serve unique customers across core trauma, upper extremities, and foot and ankle. All three businesses exited the year with terrific momentum and strong R&D pipelines. Overall, this acquisition has proven to be a great success, and we are excited about what the future holds. With that, I'll now turn the call over to Glenn.
spk01: Thanks, Jason. Today I will focus my comments on our fourth quarter financial results and the related drivers. Our detailed financial results have been provided in today's press release. Our organic sales growth was 13.2% in the quarter. The fourth quarter's average selling days were in line with 2021. The impact from pricing in the quarter was unfavorable by 0.6%. We continue to see a positive trend from our pricing initiatives, particularly in our U.S. MedSurg businesses, which all contributed positive pricing for the quarter. Foreign currency had a 3.8% unfavorable impact on sales. The supply chain disruption somewhat lessened during the quarter and our capital order book continues to be very robust as demand from our customers remains strong. In the quarter, U.S. organic sales growth was 11.2%. International organic sales growth was 18.3%. impacted by positive sales momentum across most of our international markets. For the year, organic sales growth was 9.7% with U.S. organic sales growth of 8.9% and international organic growth of 11.7%. The impact from pricing in the year was unfavorable by 0.9% and 2022 had the same number of selling days as 2021. Our adjusted EPS of $3 in the quarter was up 10.7% from 2021, driven by higher sales and strict cost discipline, partially offset by inflationary pressures and the impact of foreign currency exchange translation, which was unfavorable 16 cents. Our full year adjusted EPS was $9.34, which represents growth of 2.8% from full year 2021, reflecting the favorable impact of sales growth, lower net interest costs, and a lower effective tax rate, partially offset by inflationary pressures and the unfavorable impact of foreign currency exchange translation of 31 cents. Now I will provide some highlights around our quarterly segment performance. In the quarter, MedSurge and Neurotechnology had constant currency sales growth of 19.3%, with organic sales growth of 16.9%, which included 14.9% of U.S. organic growth and 22.5% of international organic growth. Instruments had U.S. organic sales growth of 11.7%, led by double-digit growth in the surgical technology business. From a product perspective, sales growth was led by power tools, sterishield, waste management, and smoke evacuation. Endoscopy had U.S. organic sales growth of 9.7%, highlighted by strong growth in sports medicine, communications, video, general surgery, and pro care. Medical had U.S. organic sales growth of 22.9%, driven by our emergency care and acute businesses. The growth was fueled by double-digit growth across our emergency care and prime structure businesses, and also benefited from improvement in product supply throughout the quarter. Our U.S. neurovascular business had organic sales growth of 1.5%, driven by continued market softness and competitive pressures. The U.S. neurocranial business had impressive organic growth of 19.7%, which included double-digit growth in our Sonopet IQ, Signature high-speed drills, Silverglide bipolar forceps, and MaxFace neuro product lines. Internationally, MedSurge and Neurotechnology had organic sales growth of 22.5%, reflecting double-digit growth in all businesses. Geographically, this included strong performances in Europe, Australia, and emerging markets. Orthopedics and Spine had constant currency sales growth of 8.3% with organic sales growth of 8.4%, which included organic growth of 6.2% in the U.S. and 13.6% internationally. Our U.S. hip business grew 11.3% organically, reflecting strong primary hip growth fueled by the recent launch of our Insignia hip stem, the ongoing success of the Mako PHA 4.1 software upgrade, and continued procedural growth. Our U.S. knee business grew 7.8% organically against a very strong Q4 2022 comparable of over 14%. This reflects our market leading position in robotic assisted knee procedures. Our U.S. trauma and extremities business grew 11.9% organically with strong performances across all three businesses led by double digit growth in upper extremities and foot and ankle and strong performances in plating and nailing. Our U.S. spine business grew 0.5% led by performance in our enabling technology business including the recently launched Q Guidance Navigation System. U.S. other ortho declined organically by 18.7%, primarily driven by the impact of deal mix changes, specifically more rentals related to Mako installations in the quarter. Internationally, orthopedics and spine grew 13.6% organically, which reflects strong performances in Europe, Australia, Canada, and India. Now I will focus on operating highlights in the fourth quarter. Our adjusted gross margin of 62.7% was unfavorable approximately 310 basis points from the fourth quarter of 2021, and in line with Q3 2022, reflecting the impact of the purchases of electronic components at premium prices and other inflationary pressures, primarily related to labor, steel, and transportation costs, and unfavorable business mix. Adjusted R&D spending was 5.5% of sales, which represents a 90 basis points decrease from the fourth quarter of 2021. Full year adjusted R&D spending was 6.7% of sales, which was slightly higher than our 2021 adjusted R&D spending of 6.6% of sales. Our adjusted SG&A was 30.6% of sales, which was 150 basis points lower than the fourth quarter of 2021. This reflects the impact of increased focus on discretionary cost control and headcount discipline. In summary for the quarter, Our adjusted operating margin was 26.6% of sales, which was approximately 70 basis points unfavorable to the fourth quarter of 2021. This performance is primarily driven by the aforementioned inflationary pressures, primarily on gross margin, and the negative impact resulting from foreign currency exchange translation somewhat offset by cost discipline. Other income and expense of 53 million for the quarter decreased from 2021, primarily due to net favorable interest income. For 2023, we expect a quarterly run rate of 65 million for other income and expense. Our fourth quarter and full year had an adjusted effective tax rate of 13.8 and 14% respectively, reflecting the impact of geographic mix and certain discrete tax items. For 2023, we expect our full-year effective tax rate to be in the range of 14.5 to 15.5%. Focusing on the balance sheet, we ended the fourth quarter with $1.9 billion of cash and marketable securities and total debt of $13 billion. Approximately $150 million of term loan debt was paid down in the quarter, which brings our year-to-date payments to $650 million. Turning to cash flow, our year-to-date cash from operations is $2.6 billion. This performance reflects the results of net earnings partially offset by lower accounts receivable collections due to higher sales at the end of the year, the impact of higher costs for certain electronic components, and pre-buying of certain other critical raw material inventory during the year. For 2023, we anticipate that capital spending will be approximately $600 million. again in 2023 we do not plan to do any share buybacks and will continue to focus on further debt reduction and now i will provide 2023 full year sales and earnings guidance as we assess the current operating environment we believe that there will continue to be macroeconomic volatility including supply chain constraints recession and inflationary risks and currency fluctuations despite this environment we have positive momentum in many parts of our business heading into 2023, including continued procedural recovery, many new product introductions, and a very robust order book for our capital products. Given the above, we expect organic sales growth to be in the range of 7% to 8.5% for the full year 2023 when compared to 2022. There are the same number of selling days in 2023 compared to 2022, with one extra day in Q1 and one less day in Q3. Based on the steady progress of our pricing actions, we would expect the full year impact of price to be between 0% and minus 0.5%. If foreign exchange rates hold near current levels, we anticipate sales and EPS will be modestly unfavorably impacted for the full year, being more negative in the first half of the year. This is included in our guidance. While we are not specifically guiding the quarters, Keep in mind that as you compare the first quarter to the prior year quarter, Q1 2022 did not have the inflationary pressures that we are now experiencing. So despite a strong growth outlook, we do not expect Q1 EPS to be much better than Q1 2022. Finally, for the full year 2023, we expect adjusted net earnings for diluted share to be in the range of 985 to 1015, representing a return to op margin expansion. This guidance range assumes a gradual improvement of the global operating environment, including a progressive easing of supply chain disruptions throughout the year. And now I will open up the call for Q&A.
spk00: We will now begin the question and answer session. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason at all you would like to remove that question, please press star followed by two. Again, to ask a question, please press star one. As a quick reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. Our first question comes from the line of Robbie Marcus with JP Morgan. You may proceed.
spk03: Great, thanks for taking the questions and congrats on a really nice quarter.
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