Stryker Corporation

Welcome to the third quarter 2023 Striker Earnings Call. My name is Krista, and I'll 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.

Welcome to Stryker's third quarter earnings call. Joining me today are Glenn Bainline, Stryker's CFO, and Jason Beach, Vice President of Investor Relations. For today's call, I will provide opening comments, followed by Jason, with the trends we saw during the quarter and some other product updates. Glenn will then provide additional details regarding our quarterly results before opening the call to Q&A. Before I discuss the quarter, I would like to address the concerns around GLP-1 and what is being misunderstood. Our knee business is not at risk for a slowdown. There is an oversimplification taking place as it relates to the relationship between weight and knee replacements. This ignores the more important aspects of activity level and genetics we are in fact optimistic about the positive impacts of these drugs in both the short term and the long term in the short term it will help to make ineligible people eligible for surgery sooner and in the long term it will likely lead to more surgery as people increase their activity levels with that said the rate and persistence of adoption of these medicines is still a large unknown as there are significant barriers to this taking place. Lastly, as a reminder, we have a very diversified business with needs representing about 10% of our sales. Now, moving to our third quarter results, we delivered strong organic sales growth of 9.2% against last year's nearly 10% comparable despite one less selling day versus 2022. This performance included double-digit growth in med-surgeon neurotechnology and high single-digit growth in orthopedics and spine, reflecting a sustained robust demand environment and our team's strong commercial execution. Our results were strong across the globe with high single-digit growth in both the U.S. and international markets. In addition, we remained focused on our pricing initiatives, once again realizing positive overall price. we delivered quarterly adjusted EPS of $2.46, reflecting a 16% growth compared to the third quarter of 2022. This result was primarily driven from the strength of our sales, but also demonstrates continued margin recovery. Finally, we are narrowing our expectations for 2023 to the high end of our previously provided guidance ranges and now expect full-year organic sales growth of 10% to 10.5%, and earnings per share of $10.35 to $10.45 a share. Coming off full year 2022 organic sales growth of nearly 10%, a 10-plus percent organic sales growth in 2023 reflects the strength of our super low cycle of innovation and our team's sustained high performance. And we are encouraged by an important step in our margin improvement this year. I will now turn the call over to Jason. Thanks, Kevin.

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

Thanks, Jason. Today, I will focus my comments on our third quarter financial results and the related drivers. Our detailed financial results have been provided in today's press release. Our organic sales growth was 9.2% in the quarter. The third quarter of 2023 had one less selling day than 2022. The impact from pricing in the quarter was favorable by 0.3%. We continue to see a positive trend from our pricing initiatives, particularly in our med-surg and neurotech businesses, almost all of which contributed positive pricing for the quarter. Foreign currency had a 0.3% favorable impact on sales. In the quarter, U.S. organic sales growth was 9.3%. International organic sales growth was 8.9%, impacted by positive sales momentum across most of our international markets, particularly Australia, Europe, and emerging markets. Our adjusted EPS of $2.46 in the quarter was up 16% from 2022, driven by higher sales operating margin expansion, and a lower adjusted income tax rate, partially offset by the impact of foreign currency exchange, which was unfavorable two cents. Now, I will provide some highlights around our quarterly segment performance. In the quarter, med-surg and neurotechnology had constant currency sales growth of 10.3% and organic sales growth of 10.1%, which included 10.9% of U.S. organic growth and 7.4% of international organic growth. Instruments had U.S. organic sales growth of 17.3%, with strong double-digit growth across both its surgical technologies and orthopedic instruments businesses. From a product perspective, sales growth was led by power tools, sterishield, waste management, smoke evacuation, and surge account. Endoscopy had U.S. organic sales growth of 10.6%, with strong double-digit growth in its communications and sustainability businesses. In September, the endoscopy business continued its full launch of the 1788 camera system, which provided strong sales momentum at the end of the quarter. Medical had U.S. organic sales growth of 5.7%, led by performances in its emergency care and stage businesses, and was impacted by a strong growth comparable in 2022 of almost 14%. Medical continues to have a large backlog of capital orders, and we expect a solid Q4 despite a huge Q4 comparable. Neurovascular had U.S. organic sales growth of 8.7%, reflecting a strong performance in our hemorrhagic business. Neurocranial had U.S. organic sales growth of 14.5%, which included double-digit growth in all three business units, neurosurgical, CMF, and ENT. Internationally, med-surg and neurotechnology had organic sales growth of 7.4%, reflecting double-digit growth in our instruments, endoscopy, and neurocranial businesses. Geographically, this included strong performances in Australia, Europe, and most emerging markets. Orthopedic Spine had both constant currency and organic sales growth of 8%, which included organic growth of 6.9% in the U.S. and 10.6% internationally. Our U.S. knee business grew 5.3% organically, which reflects our market-leading position in robotic-assisted knee procedures. Our U.S. hip business grew 3% organically, reflecting solid primary hip growth fueled by our insignia hip stem. The growth for both our knee and hip businesses reflects one less selling day in the quarter and a very strong comparable in 2022 of 12.4% for hips and 14% for knees. Our U.S. trauma and extremities business grew 11.5% organically, with strong performances across all businesses, led by upper extremities and foot and ankle. Our U.S. spine business grew 5.4%, led by the performance of our enabling technology and interventional spine businesses, including the recently launched Q-Guidance navigation system. Our U.S. other ortho increased organically by 1.8% due to higher MACO placements in the quarter. Internationally, orthopedics and spine grew 10.6% organically, including strong performances in Australia, Canada, and most emerging markets. Now I will focus on operating highlights in the third quarter. Our adjusted gross margin of 64.7% was favorable approximately 210 basis points from the third quarter of 2022. This improvement was primarily driven by the easing of certain cost pressures that we experienced in 2022, decreases in spot-buy purchases, and the benefit of price and mix. Adjusted R&D spending was 6.8% of sales, which represents a 30 basis point decrease from the third quarter of 2022, primarily due to a higher comparable in 2022 related to the ramping of costs for product launches. Our adjusted SG&A was 34.5% of sales, which was 140 basis points higher than the third quarter of 2022 due to continued investments, including sales growth incentives and a more normalized cadence of travel and meetings. We expect our full year SG&A as a percent of sales to be in line with 2019 levels as we continue to invest for growth. In summary for the quarter, our adjusted operating margin was 23.4% of sales, which was approximately 110 basis points favorable to the third quarter of 2022. This performance is driven by the aforementioned easing of certain cost pressures, primarily on gross margin. Adjusted other income and expense of $61 million for the quarter was slightly higher than 2022, driven by increased interest expense, partially offset by higher interest income. The third quarter of 2023 had an adjusted effective tax rate of 13.2%. reflecting the impact of geographic mix and certain discrete tax items. For 2023, we now expect the full-year effective tax rate to be approximately 14%. Focusing on the balance sheet, we ended the third quarter with $1.9 billion of cash and marketable securities and total debt of $12.7 billion. During the quarter, we paid down $100 million of debt. Turning to cash flow, our year-to-date cash from operations is $2.2 billion. This performance reflects the results of net earnings and higher accounts receivable collections. Considering our year-to-date results, our robust backlog for capital equipment, and continued positive procedure trends, we now expect full-year 2023 organic sales growth to be in the range of 10% to 10.5%. We expect pricing to be slightly positive for the full year. If foreign currency exchange rates hold near current levels, we anticipate sales will be unfavorably impacted by approximately 0.6%, and adjusted EPS will be unfavorably impacted from 10 to 15 cents per share for the full year, both of which are included in our guidance. Based on our performance in the first nine months of the year, together with our strong sales momentum, we now expect adjusted earnings per share to be in the range of 10.35 to 10.45%. And now, I will open up the call for Q&A.

To join the queue to ask a question, please press star 5 on your telephone keypad. Again, that's star 5 on your telephone to ask a question. Please ask one question and one follow-up. The first question comes from Larry Bigelson with Wells Fargo. Your line is open, sir. You may begin.

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

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

Yeah, just to finish on tax, as it relates to Pillar 2, at this point, we're not projecting really anything negative next year, if you think about our overall tax position. But, of course, we'll include that in our guidance early next year. Thinking ahead, you know, I keep talking about the super cycle of innovation, and it is really in full swing. You've seen that with the camera launch. You saw that with the amazing instruments performance in Q3 on the backs of the Neptune S launch and the Power Tool launch, which is really gaining momentum. And then we've got a very exciting next-generation professional defibrillator launch starting early next year. So I feel very good about our momentum really driven behind innovation and strong commercial execution.

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

Yeah, that's a good question, Larry. And we will give you more color on it next week at the analyst meeting. What I can say for now, though, is that We have pretty good visibility to our supply chain, our raw material purchases. To the extent possible, we enter fixed contracts related to the pricing of that, which certainly impacts our outlook for 2024. We're not seeing any more spot buys. They basically have gone away for Q3. And so we do feel pretty positive about that. We're also feeling better about our freight as things get a little more normalized and we're seeing less expediting of raw materials or even products. So we're in a good position there. I would tell you that all of this has a backdrop of inflation that we know we have to offset as we move forward and as we sprint back to 2019. So we are working on that. Part of the strategy around that has really been a lot of the positive momentum that we've seen in pricing. And we will continue to work on our pricing strategies as we enter next year. Thank you.

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

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

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

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

Yeah, look, the capital equivalent environment overall is healthy. You see that in the endoscopy and instruments numbers. Even medical, the full year medical is going to be double-digit growth. It'll be our fourth consecutive year of double-digit growth in medical. Obviously, Q3 was a little softer than Q2, which was huge. And large capital will vary a little bit from quarter to quarter. But overall, the environment's healthy. You saw the OUS numbers for other ortho were very big. So Mako's really picking up in both Asia Pacific as well as But what we are, you know, so overall, just tremendous momentum across our business on the capital side.

Great. Thanks a lot.

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

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

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

Okay, and the follow-up question, you talked about a big backlog in medical. Are you seeing hospital CapEx continue to grow as more is improved from hospitals, or are you seeing any impact in the rising rate environment and or additional pressure on physician compensation? of changing a hospital's UPAPX in the near term?

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

Great. Thanks so much.

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

Good evening, and thank you for taking the questions. Number one, can you quantify the impact of a fewer selling day? And number two, you said that the shoulder and spine applications for make go on track. Could you remind us what on track means and how do you see those products adopting and ramping over time? Thank you.

Okay, great. Thanks, Joanne. What we've always said about one-day impact, it's roughly 1% total company. It obviously has a higher impact on implants than it does on capital equipment, but approximately a 1% total company impact. And we benefited from a day earlier in the year. I think it was Q1. And then this quarter, we lost a day. The full year will be the same number of days. What we said around the timing is we expect Mako is fine, kind of around the middle of the year, next year. That's on track. We were able to show that to some surgeons at NASS and got very good feedback on that. And that product will obviously be a Mako application. which I've gotten to see, which is terrific. But it will also include an additional product coming out of our instruments division that will be used by spine surgeons as well. So we'll have a pretty tremendous ecosystem. And then shoulder will be towards the end of the year. We'll have an initial launch of shoulder. So those are the timelines we communicated previously, and we are pacing on track on both of those products.

Thank you.

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

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

Well, I wouldn't say there's much of a difference, to be honest with you. In the case of spine, you have to remember we were first, right? So Mako was first. And when you're first, the uptake tends to be a little slower, to be honest, overcoming people's objections, having to change management. I think if we think about spine, there are already a couple of players in the market. And we already have a very large footprint of robots in the market. So to me, that should be a faster ramp than what we saw with hips and knees. Shoulder will be different. It'll be a first-time application with including bone preparation. So I think that one will probably be slower in terms of its uptake, but our shoulder business doesn't really need it. It's growing faster. It's been strong double digits for a long time and will continue. They have an amazing pipeline. They launched a pyrocarbon product. We have the patient-matched glenoid. We have mixed reality. I mean, there's just so many new products on shoulder. It's not exactly like we need it to drive high growth, but it'll be, I think, very impactful. But because it involves change management, that one will probably go a little bit slower, but it's fine. And especially the way we've designed it, the workflow is very, very seamless. It's very, very efficient. It's smooth. And again, it's not the first one. So I think spine will probably be a faster option.

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

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

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

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

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

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

Yeah, Shagan, thanks for the question. We really haven't been in the habit of providing breakouts of the impacts of new products. It really is why we drive at the high end of that tech, why we consistently outperform the market by roughly 300 basis points. That's the formula. A consistent cadence of new products combined with really great Salesforce execution through our decentralized business units. That's the Striker model. What's interesting about this cycle is, as you point out, it's probably a little bit of a greater impact coming from organic innovation because so many really impactful products are all launching around the same time. I mean, if you look at our trauma extremities business, that double-digit growth performance is pretty impressive. And we don't really talk about trauma extremities nearly enough. And then we have this Pangea system, which we showed at the OTA conference recently, just in the last two weeks, and the feedback was incredibly positive. Now, that won't impact our business until the second quarter of next year, but we are ramping up for the launch. Feedback from surgeons was amazing. It's the biggest launch they've ever had. which is going to fuel even more growth on top of an already high-performing business. So I think the way to think about it is just we can count on Stryker to outperform the market very consistently because of these new products. And breaking out how much of that versus how much is price on new products and mix, we're not going to get into parsing those elements, but rest assured that that is the engine of growth for our company.

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

Yeah. Historically, we've said 200 to 300 basis points higher than the market, Shragan. I would say right now it's tracking more towards 300 basis points faster. The market has improved, clearly, versus where it was a few years ago.

But we continue to outperform it at that kind of level. Thank you.

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

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

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

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

Yeah, listen, the MAKO is performing extremely well in the ASC. And this is a reminder, right now, our hip and knee procedures, roughly call it 12% of those are being done in ASCs. That number is growing dramatically and will continue to grow dramatically. And as surgeons move their business to the ASC, they do not want to suffer. They want the best technology. They want MAKO. So I see tremendous upside in MAKOs in the ASC. Because they want to be able to do it, it lends itself very well. There's less instruments, which means less pressure on sterilization, which is a major bottleneck within ASCs. They don't have the same room for sterilization that hospitals do. So it's actually a very, very effective product to have in the ASC. And so as that percentage of 12% moves and based on different pundits, it's somewhere between 30%, 40%. As that goes higher, you're going to see more and more robots being installed in these ASCs. So there is a significant upside in front of us here in the United States. And frankly, ASCs, now they're starting to talk about it in multiple countries in Europe. In Switzerland, they're talking about it. In Germany, they're talking about it. And in the UK, they're starting to figure out that this model is actually a good model for the delivery of health care. Good for surgeons. Good for staff. Staff, frankly, nurses love going to ASCs. We're having less issues on staffing in surgery centers than we are in hospitals. And good for the patients. Patients actually like going to a place where there aren't sick people and where there's easy parking and where you can go home the same day.

Thank you.

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

Good afternoon. Thanks for taking my question. Kevin, that MAKO line this quarter was pretty eye-popping, so I'm kind of wondering, you know, J&J launched a system at WOS this year. I'm not sure it's all that great, but But, you know, Zimmer was pushing as well. Did you see a pause in the market with, you know, some of those dynamics? And then that's kind of behind you now, and you're winning a disproportionate share of Mako sales placements. And then specifically within there, are you getting, you know, more of those placements into competitive accounts than you have historically? Or, you know, is it still kind of a reasonable mix between existing striker accounts and then competitive accounts?

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

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

Yeah, thanks. Look, I'm not going to use today's call for this because we have an analyst day next week, an investor day, and we're going to have a surgeon there. And we'll actually devote some time to the GLP discussion. What I would tell you is the study is saying that there's going to be a reduction, I think, are nonsense. And here at the AUKUS meeting, In Dallas right now, spent the morning talking to multiple surgeons at massively credible teaching hospitals, world-renowned teaching hospitals who have poured through the research and feel that there is no need for us to worry whatsoever about any slowdown in our knee procedures.

Great. Thank you.

The next question comes from the line of Josh Jennings with P.D. Cohen. Your line is now open. Please go ahead.

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

Yeah, look, it's still early days if you're thinking about the big consolidation that's occurring. And it's not the only one, right? The last four or five years, we've seen quite a bit of consolidation. There's still more operators in spine than we see in some of our other specialties. But I think one of the drivers of the consolidation is enabling technologies. It really is sort of ticket to the dance to be successful long term is having really good enabling technologies. Our queue guidance system, we're delighted with the performance of that with the fastest camera on the market, which we developed internally at Stryker. And that queue cart will then be paired with Mako in the future, which is really exciting and will provide an even smaller footprint than what you see with the other spine-enabling technology ecosystem. So I think that's really the catalyst for the future, and that will probably provide even more consolidation going forward. But as it relates to the Salesforce ecosystem, The little early days right now, not a lot of change. I think you're going to see more of that change as you roll into next year when they have to decide who's in which territory, who's in which person. They're sort of holding things constant for now, but that disruption will come, and we look forward to taking advantage of that however we can.

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

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

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

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

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

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

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

Great. That's helpful. And then I know you're not going to give the answer, but just curious to kind of level set what we should expect at the analyst day. Are you going to give some sort of revenue and margin long-range plan? It sounds like 24 guidance won't be until January. Just curious to kind of level set what we should expect there.

Yeah, Travis, Jason, a couple comments I would say. First off, to your point, as it relates to specifically 2024, we'll get into that more in January. As you think about Investor Day next week, it'll be kind of more the long-range plan. We've certainly talked about sprinting back to 2019 margins. You'll hear more about that and when we'll get back there. And then also just how we think about growth over the next three years as well. But again, we'll narrow in on 2024 in January.

All right, great. Thanks a lot.

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

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

Yeah, listen, yeah, we're targeting kind of, let's call it Q3 for the spine robot on Mako. What I'd say is that we, the Mako launch, Her spine will be for pedicle screw placement, but it is a fabulous workflow, faster than what's on the market today and smoother. So I'm really pleased with what I've seen with our Mako spine robot. In addition, I keep mentioning we have this additional product that will be launched within the same ecosystem using the same navigation card that does bone cutting. It is not specifically a Mako product. It's a different product. but it operates within the same ecosystem. So I believe that we'll go from today being behind to being ahead of the market with the launch of those two. And those two products are coming at the same time. So the other product, the bone-cutting product, will arrive at the same time as Mako and provide a really fabulous ecosystem.

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

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

Thank you.

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

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

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

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

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

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

Hey, good afternoon, guys. Thank you so much for taking the question. And I actually had a question. I'm sure you guys will talk about this more next week. So sorry if I'm front running that. But international looked pretty strong this quarter. Just curious about what you can say, what's driving that growth and how sustainable is that? And then the second part of the question is on the orthopedic backlog and whether the magnitude of the backlog this quarter versus last and the quarter prior has come down. Appreciate you believe it's going to continue to contribute into 2024. But I guess I'm just trying to get a sense of the magnitude of that contribution going forward, how we should think about that. Thank you so much.

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

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

Very helpful. Thank you.

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

All right, great. This is Yong Lee. And for Matt, thanks for squeezing us in here. I guess to start, I was wondering, you know, price is positive this quarter, continuing the trend from early in the year. I guess I'm just wondering, you know, how sustainable do you think the positive price momentum can be going forward?

Sure.

You're right. Q3 kind of continued our favorable pricing trend with sort of 0.3%, you know, coming off a Q2 that was 0.5%. A couple comments I would say, you know, as we look at the full year, we think that we'll be positive for the full year. And we also have put in place kind of the incentive process as well as the contracting process to really make sure that we're considering price as we think about working with our customers on buying products. So I feel good that we have the sort of mechanism that is going to continue to look at price. You know, that being said, you're absolutely right. We'll anniversary on product over product year over year, which may make things a little bit tougher. One thing that I would keep in mind, though, that, you know, Kevin talks about this product super cycle and a lot of next gen products coming out. So if you think about our pricing calculation statistic, it really doesn't include the impact of price increases that we get on those products because of the technologies that they're bringing to market. So I think that is actually an element of pricing that's going to help us as we think about next year. And I don't think it's something we're going to walk away from. As long as inflation is having an impact, we'll continue to have those discussions with our customers about pricing.

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

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

Thank you very much. Thank you. There are no further questions in the queue.

I will now turn the call over to Kevin Lobo for closing remarks.

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

Thank you. This call has concluded. You may disconnect at any time.