Kevin Lobo:

Welcome to Stryker's first quarter earnings call. Joining me today are Glenn Boehnlein, Stryker's CFO; and Jason Beach, Vice President of Finance and Investor Relations. For today's call, I will provide opening comments followed by Jason with the trends we saw during the quarter as well as some product updates. Glenn will then provide additional details regarding our quarterly results before we open the call to Q&A.

Jason Beach:

Thanks, Kevin. My comments today will focus on providing an update on the current environment, capital demand and select product highlights.

Glenn Boehnlein:

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

Operator:

[Operator Instructions] Our first question will come from Robbie Marcus with JPMorgan.

Kevin Lobo:

Yes. Thanks, Robbie. Yes, we're really pleased with the performance in the first quarter, and really nothing has changed. So the good level of volumes that we're seeing in procedures that we saw through 2024 has continued into 2025. And our capital order book remains very strong. So capital equipment, whether it's large capital or small capital, remains very robust. We have a nice healthy backlog, and that gives us the confidence to raise our organic sales growth guide for the full year.

Kevin Lobo:

Yes. Thanks, Robbie. Not a major change. I would tell you the Interventional Spine business had a terrific quarter. That was really high growth. Our enabling technologies within Spine, the Q Guidance System has really picked up good momentum as well. The Mako Spine and the CoPilot won't be launched until the fourth quarter. So that's not really having much of an impact. And I wouldn't say that the competitive disruption or the competitive merger is really having much of an impact yet. It's still very early days. So nothing too remarkable, but overall, a good number and a good solid number for our Spine business.

Larry Biegelsen:

Congrats on a nice quarter here. One for Glenn, one for, I think, Kevin. Glenn, just maybe on the EPS raise of about $0.10 at the midpoint. Can you help us bridge kind of how much of that was operational? How much of that is coming from kind of below the line, other income being a little lower? And obviously, FX is a greater headwind. So just kind of the pieces that led to the $0.10 raise, and I had one follow-up, please.

Kevin Lobo:

Yes. Thanks. I'm a little bit mystified by this concern, to be honest with you. If you attended the Sage's meeting, you could clearly see that we have a very differentiated solution that will frankly enable -- they can grow at whatever rates they're growing with their new product, and we're going to continue to have a very strong performance in endoscopy, both this year and for years to come. The overlap in our businesses is minor. We are multi-specialty. We play -- and most of our procedures, frankly, aren't being done robotically today. We also are the clear leader in fluorescence imaging.

Operator:

Our next question comes from Ryan Zimmerman with BTIG.

Kevin Lobo:

Yes. Great. So certainly, if you look at our fourth quarter last year, I wouldn't think that, that was -- those were easy comps. We had a pretty monstrous fourth quarter last year. And so comps is probably the biggest concern that we have, and we do pick up an extra selling day in Q3 and extra selling day in Q4. It's only one quarter, right? There's a lot of uncertainties out there in the marketplace. We feel very good about our business. And I think this is an appropriate raise at this time. Let's see how things go at the end of the second quarter, and we can update you further on the outlook for the year.

Kevin Lobo:

Yes. Certainly, when I talk about those 5 areas, those are adjacencies. So we have our core basically supplementing our existing businesses with new technology. That's always going to be the majority of the deals we do. And beyond that, as we think about adjacencies, those are what I'm calling my sort of top 5 priority adjacencies. And what I'd tell you right now is we have an incredibly healthy pipeline of deals.

Operator:

Our next question comes from Joanne Wuensch with Citibank.

Kevin Lobo:

Yes. Sure. I can start on the Instruments, and I'll let Jason talk about the other ortho. And you're right, these are bright, shining stars. The Instruments division had a fantastic quarter, and it was really, really across both Surgical Technologies as well as Orthopaedic Instruments. Really across the board.

Jason Beach:

Yes. Joanne, it's Jason. I'll take the other ortho here. So just a couple of additional comments, I guess, to my prepared remarks would be, like I said, we had a record quarter of installation in the first quarter this year. If you remember, we had a record quarter in the fourth quarter of last year. So the momentum is going really well on the Mako front. I commented on the direct-to-patient campaign. We've seen really good results out of that. So we feel good about it, and we like what this will translate in terms of the Hips and Knees business as we move forward as well.

Pito Chickering:

Looking at the international growth, can you talk about what you're seeing in Europe versus the higher growth markets like Japan and China? And how should we think about the growth internationally if we're using the 6.8% seen this quarter on a constant currency basis?

Pito Chickering:

Great. And then the second question was strong utilization across the country for hospitals and good margins. We're seeing hospitals want to increase their CapEx spending. I guess what areas of your portfolio do you think sort of has the most upside for hospitals increase in the CapEx dollars?

Operator:

Our next question comes from Shagun Singh Chadha with RBC Capital.

Kevin Lobo:

Yes. Thanks for the question. What I would tell you is we're in this constant rhythm of innovation. And we just had a number of products sort of collide at the same time, but they're constantly being refreshed. So I wouldn't think about this as a fleeting moment. If you think about 9.7% in '22, 11.5% in '23, another potentially double digit, we'll see. We're not guiding to that just yet, but we have a chance certainly to get to another double-digit growth this year, and next year, you're going to have the impact. We're just launching LIFEPAK 35. It's not going to have as much of an impact this year as next year. Pangea not as much impact this year as next year. The Mako applications have really no impact this year. It's really more next year. And then we'll just keep rolling other innovations on top of that.

Shagun Singh Chadha:

That's really helpful. And then just a couple of follow-ups on the ortho side. Just any updates on Mako for spine and shoulder robot? Are you still on track for 2024 and a year-end '24 launch for both of those?

Operator:

Our next question comes from Vijay Kumar with Evercore.

Kevin Lobo:

Look, I'd just call it a stable market. It really hasn't changed much, if you think about waiting lists. If you think about staffing, it's continually gotten better over the course of '24. So I would just say it's very stable in terms of the overall market. I don't see shortening at all. I don't see it elongating. It's just as we saw through '24 -- '23, sorry, it's a continuation into '24 of that kind of stable marketplace.

Glenn Boehnlein:

Sure. Yes. I think in Q1, what you saw was just timing between working capital in Q4 and Q1. And then just sort of seasonally in Q1, we have higher cash outflows that occur. So that's the impact of that. On an overall basis, there's no change to the targets that we discussed back at the analyst meeting in November, and that would be the 70% to 80% free cash flow conversion number.

Travis Steed:

Congrats on a good quarter. On the Mako installations, curious -- big insulation number, but curious how many of those are going into competitive accounts. And is that a leading indicator for share gains in ortho?

Travis Steed:

Great. And then the 50% growth in smoke evacuation, was that a big step change versus where it's been running at? And I'm just curious if there was something that drove that acceleration in smoke evacuation, if it's kind of better bundling across the portfolio or more reps pushing that product.

Kevin Lobo:

Yes. We've also had our supply chain has really improved in terms of being able to meet the tremendous demand that we've had, and that was also a contributor. So we've had tremendous growth, tremendous demand. And our supply chain has really kicked in, in a strong way, and that puts us in a good position not only to deliver in the first quarter but also to deliver in the quarters ahead.

Matthew O'Brien:

Just real quick, it sounds like Mako is getting -- Mako Spine is being pushed out. Just I don't know if it's 3 to 6 months. Is that about right? And then is it a software issue, hardware issue, something else you're going to incorporate into it that's causing this modest push?

Matthew O'Brien:

Got it. And then on the MedSurg side of things, I think, Kevin, you've said double-digit growth is what you expect for the next 5 years there. Is that needing to have the backlog? And I mean is there any way to quantify how significant that backlog is right now and how much of a tailwind it is versus all these new products that you got coming like defibrillators, et cetera? Because the Street is nowhere near double-digit growth for the MedSurg business over the next couple of years.

Matthew Miksic:

Congrats on a really strong quarter, which looks to me like and a lot of the feedback I'm getting is that it really is just all about comps. I mean double-digit organic growth against low teens -- low to mid-teens organic growth last year is -- that is at least impressive to us. So congrats on the continued momentum. I had one follow-up, if I could, on the Mako robot and maybe just the nature of the launch. If you could walk us through, is that you're expecting a limited launch and then sort of picking up momentum in 2025? And then, Kevin, if you could maybe talk about some of the either new aspects of that platform or some of the other products that you're kind of excited about in the next couple of quarters that they will start coming to market and adding to growth in the back half in '25. I appreciate it.

Danielle Antalffy:

Congrats on a really strong start to the year. I guess, Glenn, this is probably a question for you on that 150 bps target for operating margin expansion. I mean just based -- I know it's early. You guys just [ gave ] this about 6 months ago. So not trying to be too greedy, but 80 bps year-over-year in Q1, it sounds like things are actually only getting better from here as it relates to super cycle of product. Inflation presumably starts to continue to ease, hopefully. So I guess just any comments you can make about that 150 bps target based on what you guys did here in Q1. And that's it for me.

Operator:

Our next question comes from Matt Taylor with Jefferies.

Kevin Lobo:

Yes. Well, I'd say -- if you look at our trauma business, core trauma, so excluding upper extremities and lower extremities, if you look at core trauma, we've been historically the leading nailing company in the marketplace. But we haven't been the leading plating company. Now we have some terrific places, whether it's our clavicle platters, our pelvic products. But we didn't have a comprehensive system of variable angle plating. This is an amazing product launch, very comprehensive and will really be a shot in the arm for plating, which, by the way, is more than half of the procedures in trauma are plating versus nailing.

Operator:

Our next question comes from Caitlin Cronin with Canaccord.

Jason Beach:

Caitlin, it's Jason. As we think about upper extremities, this continues to be a fast grower for us. As we think about kind of transition and the opportunity in the ASC, no change from that perspective. And we expect this will continue to be a fast-growing business for us.

Jason Beach:

Those were the -- those were the big...

Caitlin Cronin:

Great. And then just a question [indiscernible] given it's post close now what the strengths do you really see that bringing to your Hip portfolio going forward?

Operator:

Our next question comes from Richard Newitter with Truist.

Jason Beach:

Sam, it's Jason. I'll take this one, and Glenn can pile on anything additional here. But again, to Glenn's comments, as you think about the margin expansion getting to 100 bps on a full year basis being second half weighted, it certainly would imply that you could have a quarter less than that from a margin expansion standpoint. Certainly, margin expansion in every quarter, but I wouldn't necessarily say it'd be to the levels of what you saw in Q1 every quarter.

Joshua Jennings:

I was hoping to just dig into the 20 bps of pricing pressure experienced by the Orthopaedics and Spine units. Any chance you can help us think more -- provide more details on the pricing headwind experienced by the total joint franchise Knees and Hips? And then at AAOS, it seems like there's -- and still with your guidance that there's optimism that the macro device industry may be in a new kind of era of pricing. Any updated thoughts there? And then just one follow-up.

Jason Beach:

Josh, it's Jason. I'll take this one. I'd say a couple of different things here. As we think about the market, our view has really not changed at all here. Even if you go back to Investor Day in November of last year, we said the ortho markets would grow, call that mid-single digit area. And we would outperform that 200 to 300 bps above that. So as we think about the full year this year, that's kind of how we're looking at the markets, and we feel as good as ever about that.

Andrew Ranieri:

Kevin, just 2 for you. Would you mind just talking about the trends you're seeing internationally in Mako? Any plans for geographic expansion in 2024? And really kind of like what utilization levels you're seeing with the Mako system outside the U.S.? And then second, just with the Gauss Surgical product, you touched on that. But can you also give us any more color on where you think you can take the product next within your MedSurg portfolio?

Operator:

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

Kevin Lobo:

Welcome to Stryker's fourth quarter earnings call. Joining me today are Glenn Boehnlein, Stryker's CFO; and Jason Beach, Vice President of Investor Relations. For today's call, I'll provide opening comments, followed by Jason with the trends we saw during the quarter, MAKO performance insights and updates on recent acquisitions. Glenn will then provide additional details regarding our quarterly results and 2024 guidance before opening the call to Q&A. First, I want to recognize and celebrate our achievement of surpassing $20 billion in sales. We continue to be a high-growth company with a focus on our mission to deliver for our patients and customers. As we begin 2024, I am very excited about our future. We are in a strong position with robust demand across both procedures and capital, easing macro constraints and a strong pipeline of innovation. I want to thank our over 50,000 employees for their unrelenting determination, agility and performance. We've delivered terrific sales growth of over 11% in Q4 and the full year despite strong comparatives from the prior year. Our commercial execution, including many successful product introductions was excellent across our businesses and regions. Globally, for both Q4 and the full year, we had double-digit organic sales growth in instruments, endoscopy, medical, neuro cranial, hips, knees and trauma and extremities. For the full year, we also had double-digit organic sales growth both in the U.S. and internationally. Spine and neurovascular also demonstrated good performances while making notable advancements in future innovations and acquisitions. It was a comprehensive performance across our businesses, and we have built significant momentum entering 2024. For the sixth straight year, our international sales growth, excluding China VBP outpaced our strong U.S. business. Canada, Australia and most emerging markets had double-digit growth, while Europe and Japan grew in high single digits. International continues to be a large growth opportunity for us. Next, we delivered quarterly and full year adjusted EPS of $3.46 and $10.60, respectively, which represents 15% growth for Q4 and 13% growth compared to the full year of 2022. This was driven by our strong sales, but also demonstrates our continued operating margin recovery. We remain focused on driving high growth now and in the future through investments in organic innovation and M&A. We expect to continue to deliver sales growth at the high end of medtech, which is reflected in our full year 2024 guidance of organic sales growth of 7.5% to 9%. This growth, combined with an accelerated margin expansion plan, translates to an adjusted EPS of $11.70 to $12 per share. I will now turn the call over to Jason.

Glenn Boehnlein:

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 11.4% in the quarter, compared to 13.2% organic growth in the fourth quarter of 2022. The fourth quarter of 2023 has the same number of selling days as 2022. The impact from pricing in the quarter was favorable by 0.7%. We continue to see a positive trend from our pricing initiatives, particularly in our MedSurg and Neurotech businesses, all of which contributed positive pricing for the quarter. Foreign currency had a 0.3% favorable impact on sales in the quarter. In the quarter, U.S. organic sales growth was 12.7%. International organic sales growth was 7.7%, against a very strong comparable of over 18% in 2022. This performance included positive sales momentum across most of our international markets, particularly Australia, Canada, Japan and most emerging markets. For the year, organic sales growth was 11.5%, with U.S. organic sales growth of 11.7% and international organic sales growth of 10.9%. Excluding the impact of China VBP, international growth was 12.8%. The impact for pricing in the year was favorable 0.6%. Foreign currency had a 0.5% unfavorable impact, and 2023 as the same number of selling days as 2022. Our adjusted EPS of $3.46 in the quarter was up 15.3% from 2022, driven by higher sales and operating margin expansion, as well as lower other income and expenses. Foreign currency exchange translation had a favorable impact of $0.02. Our full year adjusted EPS was $10.60, which represents growth of 13.5% from full year 2022, reflecting the favorable impact of sales growth and operating margin expansion, partially offset by the unfavorable impact of foreign currency exchange translation of $0.10. Now I will provide some highlights around our quarterly segment performance. In the quarter, MedSurg and Neurotechnology had constant currency sales growth of 12% and organic sales growth of 11.8%, which included 13.8% of U.S. organic growth and 5.7% of international growth. Instruments had U.S. organic sales growth of 11.5%, with strong double-digit growth across its Surgical Technology and Orthopedic Instruments businesses. From a product perspective, sales growth was led by power tools, SteriShield, smoke evacuation and surg account. Endoscopy had U.S. organic sales growth of 17.9%, with double-digit growth in its Communications, Endo, BEU and Sports Medicine businesses. From a product perspective, this includes strong growth in booms, lights and video. During the quarter, the Endoscopy business continued to see very strong momentum of the 1788 camera system, which had its full launch in September. Medical had U.S. organic sales growth of 12.9%, led by performances in its Vocera, Acute Care and Sage businesses. This included strong growth in Vocera badges, beds, stretchers and Prevalon repositioning products. All of this was against a very strong comparable growth of over 20% in 2022. Neurovascular had U.S. organic sales growth of 7.6%, reflecting solid performance in our hemorrhagic business. Neurocranial had U.S. organic sales growth of 14%, which included double-digit growth in the neurosurgical and ENT businesses, with strong growth in high-speed drill and balloon dilation products. Internationally, MedSurg and Neurotechnology had organic sales growth of 5.7%, reflecting double-digit growth in our instruments and neurocranial businesses. Geographically, this included strong performances in Australia, Canada and Japan. Orthopedics and Spine had constant currency and organic sales growth of 10.7%, which included organic growth of 10.9% in the U.S. and 10.1% internationally. Our U.S. Knee business grew 12.9% organically, which reflects our market-leading position in robotic-assisted knee procedures. Our U.S. Hip business also grew 12.9% organically, reflecting solid primary hip growth fueled by our Insignia Hip Stem. Our U.S. Trauma and Extremities business grew 12.1% organically, with strong performances across all of its businesses, including Upper Extremities, Biologics, Core Trauma, and Foot and Ankle. Our U.S. Spine business grew 6%, led by the performance in our Enabling Technology and Interventional Spine businesses. Internationally, Orthopedics and Spine grew 10.1% organically, including strong performances in Canada and most emerging markets, particularly driven by Mako and strong Knee performance across most geographies. Now I will focus on operating highlights in the fourth quarter. Our adjusted gross margin of 63.9% was favorably – was favorable approximately 120 basis points from the fourth quarter of 2022. This improvement was primarily driven by the continued easing of certain cost pressures, including the elimination of spot buy purchases that we experienced in 2022, and the continued benefit of pricing initiatives. Adjusted R&D spending was 5.6% of sales, which was 10 basis points higher than the fourth quarter of 2022. Our adjusted SG&A was 31% of sales, which was 40 basis points higher than the fourth quarter of 2022 due to continued investments, including sales growth incentives and a more normalized cadence of travel and meetings. In summary, for the fourth quarter, our adjusted operating margin was 27.2% of sales, which was approximately 60 basis points favorable to the fourth quarter of 2022. For the full year, our adjusted operating margin was 24.2% of sales, a 40 basis points increase over 2022. This performance is mainly driven by the easing of certain gross margin cost pressures throughout the second half of the year as well as the positive impact of our pricing actions. Adjusted other income and expense of $31 million for the quarter was $23 million lower than 2022, mainly driven by higher interest income and other favorable discrete items. For 2024, we expect our full year other income and expense to be approximately $250 million. Our fourth quarter and full year had an adjusted effective tax rate of 14.6% and 14.1%, respectively, reflecting the impact of geographic mix and certain discrete tax items. For 2024, we expect our full year effective tax rate to be in the range of 14% to 15%. Focusing on the balance sheet, we ended the year with $3 billion of cash and marketable securities and total debt of $13 billion. During the year, we paid down the remaining $850 million outstanding on the $1.5 billion term loan associated with the Vocera acquisition and achieved our deleveraging commitments. In Q4, we also refinanced certain debt maturities, including prefunding of $600 million that is due in May 2024. Turning to cash flow, our year-to-date cash from operations was $3.7 billion. This performance reflects the results of net earnings and higher accounts receivable collections. For 2024, we anticipate that capital spending will be $650 million to $700 million. We do not anticipate any share buybacks. And now I will provide 2024 full year sales and earnings guidance. Based on our momentum from 2023, strong procedural volumes, healthy demand for capital products and a stabilizing macroeconomic environment, we expect organic sales growth to be in the range of 7.5% to 9% for 2024. There is one additional selling day in 2024 compared to 2023, with one less day in Q1 and one more day in both Q3 and Q4. Based on the steady progress of our pricing actions, we would expect the full year impact of price to be roughly flat. If foreign exchange rates hold near current levels, we anticipate sales will be modestly, unfavorably impacted for the full year, being more negative in the first half of the year. EPS will be negatively impacted $0.05 to $0.10. This is included in our guidance. Finally, for the full year 2024, we expect adjusted net earnings per diluted share to be in the range of $11.70 to $12, representing our commitment to accelerated operating margin expansion in 2024 as well as the stabilized – stabilizing operating environment. While we do not provide quarterly guidance, we do expect seasonality for sales and related earnings to be similar to 2023, but adjusted for the quarterly differences in 2024 selling days. And now I will open up the call for Q&A.

Robbie Marcus:

Great. Thanks and congrats on another fantastic quarter. Kevin, maybe to start, I feel like it's a bit of déjà vu, where we were sitting here at exactly this time last year and investors were starting to worry after a good year in 2022. And how good can 2023 be, and now people are wondering about 2024. So I was hoping you could give a little color behind the 7.5% to 9% organic sales growth. How much of that is transitory? How much of that is durable pricing? And any key drivers you could point us to? Thanks.

Robbie Marcus:

Great. Maybe, Glenn, a follow-up for you. And I appreciate you don't guide quarterly, but there's a lot you could do to help us get models in the right spot based on what you can say. And I guess, really the question is, my math is implying 50 to 100 basis points of operating margin expansion. You talked about the top line should look like 2023. And I imagine that looks like a normal comparable quarter and first quarter and maybe some sharper seasonality than historically down 3Q up 4Q. Also, anything down the P&L operating margin that we should be considering in that seasonality? Thanks.

Operator:

Our next question will come from Lawrence Biegelsen with Wells Fargo. Your line is now open. Please go ahead.

Kevin Lobo:

Yes. Thanks, Larry. I would say that we're back on M&A offense now, what I'll call our normal M&A offense. And as you've seen in the past with Stryker that would typically mean larger volume of tuck-in deals. And those can be large, and they can also be small. During the pause, while we paid down debt, all of our BD teams worked very actively. Believe me, they have a long list of targets, and we are going to be active now that we've gotten our leverage back to where we'd like to be. So let's say we're back to the normal Stryker offense. Expect us to be doing deals. We are open to larger deals. But our history would tell you that the vast majority of our deals are going to be smaller tuck-ins, but we can do many deals versus being very limited last year.

Glenn Boehnlein:

Yes, Larry, I think, first of all, we're not backing off of our sprint to 2019 op margin at all. And we have clearly had a plan to get there by the end of 2025. As I said at Analyst Day, we have good opportunities in operating expenses and in gross margin. I think if you look at our delivery in 2023, we got about 80 basis points out of gross margin and we invested in some operating expenses that we had indicated would get back to sort of normalized spend. So my thoughts on 2024 is that expansion will generally be led by operating expenses, but there continues to be really good opportunities in gross margins that we continue to work on. And if you think about some of these things, price isn't going away from us. We're still going to continue to work on that. Viju elaborated on the benefit we have of low-cost manufacturing sites, and we'll continue to see expansion there. We have opportunities in purchasing and procurement, supplier consolidation. On the OpEx side, we'll continue to expand into shared services in some of these low-cost areas where we have those. And then honestly, from OpEx, we have a lot of natural leverage. It just comes when you're growing at the rate that we're growing.

Ryan Zimmerman:

Yes, thanks for taking the question. So I want to ask about orthopedics. It's just been stellar performance. And we've heard from you and one of your peers. And Kevin, I just would appreciate if you can kind of characterize the confidence that this continues to persist for 2024. And how are you improving or what are you doing to improve potentially productivity on the Mako unit to capture demand that's continuing to be so strong?

Ryan Zimmerman:

Okay. And then maybe turning to medical because it is now, I think the biggest unit inside the company and the comps are increasingly tougher in the first half of this year. It’s been exemplary growth through late 2022, and then in the first half 2023, inside of that, you talked about Vocera continuing to be a double-digit grower, but if you can level set us on the entire portfolio, how you think about the ability of that business to continue to be accretive to overall growth and maybe what the appropriate expectations are around the medical segment given how much is in that segment.

Operator:

Our next question will come from Joanne Wuensch with Citi. Your line is now open. Please go ahead.

Kevin Lobo:

Yes. I’ll take the first part and then Jason can talk about AAOS. Look, that, that I would say that our pipeline of innovation is incredibly strong. When I mentioned the term super cycle, that really was referring to, let’s call them big platform launches. But the reality is we’re driving tremendous growth even in some of the divisions that don’t have big platform growth launches, if you think about upper extremities, if you think about foot and ankle, but I would say the big ones coming up, we have this Pangea launch within our core trauma business, which is a big platform launch.

Operator:

Our next question will come from Vijay Kumar with Evercore ISI. Your line is now open. Please go ahead.

Kevin Lobo:

Yes. Hi, Vijay. As we look at – I don’t want to guide quarterly, but I would tell you that the cadence of what we’re going to deliver from the mid-point will play out similar to 2023. But keep in mind, you got to back out one selling day in Q1 is what I would say and then on VBP, I’ll let Jason.

Vijay Kumar:

Understood. And Kevin, maybe one for you on that. I saw you mentioned direct-to-consumer campaign on MAKO is very successful. Could you just elaborate on that? And I’m curious, do you think, like, on the Spine side, we could perhaps see adoption rates similar to knee, where 50%, 60% of Spine procedures could be done in MAKO at some point in the future?

Operator:

Our next question will come from Shagun Singh with RBC. Your line is now open. Please go ahead.

Kevin Lobo:

Okay. Well, I think if you look at the hospitals and what they’re saying, that’s kind of one of the indicators we look at. They’re busy, right? The hospitals are busy, patients, definitely aging demographics plays for Stryker’s portfolio that definitely plays to our advantage. And every day, 10,000 more people are turning 65. The activity levels are also increasing, right. The advent of Pickleball has been a terrific thing for our business. More active people who are elderly tend to want to stay active. And activity levels are kind of the biggest predictor of needing joint replacements and sports medicine procedures. So we’re seeing very good activity levels. And so I don’t really want to talk about backlog. I just think what we’re seeing is patients presenting, frankly, some patients who are just wanting to be more active, losing weight and then wanting to be more active and then being eligible for surgery. So we do see really good waiting lists for surgeries for surgeons in the orthopedic space, hospitals ordering capital, whether it’s small capital or large capital, building more ASCs. The ASC trend has actually really helped, because patients love it. They go, they get home the same day, they have a terrific experience, and they tell all their friends, and that word of mouth is spreading for hip and knees, absolutely, for hip and knee surgeries that is happening. And our percent of procedures in ASCs continues to climb. So I think those are the – there’s a number of factors I just outlined, all of them pointing to, at least for this year, continued good demand. And I don’t know how temporary it is. This could be continuing, frankly, for a period of time, because I think demographics and activity levels are the two drivers that we’re seeing, at least for our portfolio of businesses.

Kevin Lobo:

Yes. Great question. First of all, we have a history that we generally like to follow, and I would tell you that it’s early days. We’re here in January looking at 2024, we feel very confident about where we’re going to perform on sales and driving off margin expansion. At this point, I’m not going to comment on the potential to go beyond that, but we feel very good about the guidance that we put out.

Pito Chickering:

Hey, good afternoon and thanks for taking my questions and congrats on an amazing year. On the gross margins, can you help bridge the third quarter to fourth quarter gross margins? How much of the impact was mixed? And then you have the good guys and bad guys that can help us understand that sequential change?

Pito Chickering:

Great. And then on pricing, back in third quarter, I think it was about 30 basis points favorable, it’s 70 basis points favorable this quarter. Guidance assumes flat pricing for 2024. I guess, shouldn’t there be some positive pricing in 2024 just as the fourth quarter comes out? And after you gotten accelerating pricing throughout the year, I guess, why should 2024 pricing flatten out? Thanks so much.

Operator:

Our next question will come from Travis Steed with Bank of America. Your line is now open. Please go ahead.

Kevin Lobo:

Sure. Yes. I think you can do the math as well as I can, especially given all the areas that I’ve guided in the full year. So I definitely think you’re in the zip code for what we think will happen in 2024. And honestly, if we look at sort of what we’ve laid out and planned for the year, first of all, the natural leverage we get from growth versus fixed cost in operating expenses certainly will provide us some benefits. We also won’t stand still in a lot of the gross margin initiatives that I mentioned, and those will move forward and also provide some benefit that we’ll see in 2024. And so I would tell you that we haven’t walked lightly on this. I would say that across the globe, Stryker is very focused on these op margin expansion projects and sustainable op margin expansion for 2024 and 2025. And so we feel very confident that we’ll be able to deliver that.

Kevin Lobo:

Yes. Listen, as we’ve said from the beginning, MAKO shoulder will launch at the end of 2024. So I don’t expect to have much at all of a revenue impact. That said, it’s not like our shoulder business needs MAKO shoulder to be growing at strong double digits. They have terrific products within upper extremities with shoulder ID with a number of really pyrocarbon humeral. We have a fracture stem for Perform, which is incredible, a Reverse Perform stemless. So they have four terrific launches with an upper extremity. So they’re going to do fine even before MAKO. But MAKO will be the end of the year. The feedback from searches have been terrific. But that’ll have much more of an impact in 2025, not so much in 2024.

Matthew O’Brien:

Afternoon. Thanks for taking the questions. Just on MAKO, this question might be for Jason. Just the domestic number this quarter was a little bit soft, and we’re hearing about one of your competitors just giving their system away because it’s not all that great. Can you talk about the dynamics that you’re seeing in the market, especially domestically for MAKO in terms of placing systems, selling systems, and then just having to get really aggressive on the pricing side, just given the environment that you’re in? And then conversely, the OUS number looks phenomenal again. Just where are we at in terms of growing that business over the next several years? And I do have one follow-up.

Kevin Lobo:

Yes. The only thing I would add to Jason’s comments are every ASC MAKO that’s installed is financed everyone, and that’s becoming a bigger percentage of the MAKO installation. So what you’re seeing is more financed rentals and financed versus outright capital purchases. So that obviously the revenue number and the revenue growth of 3 percentage or less is not the installation growth. The installation growth is higher than what you’re seeing. And over time that’ll start to normalize and then you’ll start to see the growth rate be more reflective of the installation rate. But we’re going through this kind of transition phase right now, and we are giving them away. So we charge for it and we have different pricing models, obviously, and we want the customers to have skin in the game, so that if we just give it away, they have no incentive to use it. And what we don’t want are a bunch of robots collecting dust. So we care a lot and we monitor utilization of the robots very, very significantly. And then, of course, OUS we’re seeing terrific pickup and a lot more purchases than finance. We do offer financing around the world, but so far in international we’re seeing a lot more purchases than we are financing, which is why you see the revenue spike. But again, international has a huge potential. It’s kind of where we were in the U.S. about five years ago.

Kevin Lobo:

Yes. What I’d say is, first of all, the MAKO brand is extremely well known. That’s a very, very big positive. And I think what you’re going to see is a much faster uptake than you would have seen had we not had already had MAKO on hips and knees. Will it take a little bit of time? Sure. Will a spine surgeon want to share the robot with hips and knee surgeons? Not sure yet. Obviously, that’s something we’re going to see play out, whether they’re going to want their own robot or they’re going to be willing to operate on the days that the hip and knee people aren’t operating. So that’s a whole dynamic. I think that’ll vary account by account. So we’re already working on our commercialization plans. I think part of the reason for our success is – success with the Q guidance, which is one half of the system. So you’re going to have the Q guidance and then as well, MAKO, they know it’s coming now. Customers have gone to Leesburg, Virginia, our spine headquarters, to see MAKO spine. And many of them have stopped their purchases of other robots knowing that this is coming. So I think that’s what’s helping to contribute to our, let’s call it somewhat improved performance, but we still would like to grow at a higher rate than we are right now. And we know we need not just MAKO, but also the CO-PILOT product. So we’re going to go from being behind to being ahead. And CO-PILOT should launch in a similar time frame slightly ahead of MAKO spine. So you’re now going to have the CO-PILOT product plus MAKO spine, where our competitors will just have their robot. The ones that have robot will just have a robot without CO-PILOT with haptic feedback that can do the laminectomy and discectomy portions of the procedure, which complements the pedicle screw placement. So we’re really going to be in a great position by the time third quarter comes around. Robots do take time, so the scaling will take time, but I think it’ll be certainly much faster than the initial people who came in with robotics, they know, they benefit from it, and they know and they can trust the MAKO brand.

Josh Jennings:

Hi good evening. Thanks for taking the questions. I wanted to, hopefully, Kevin, ask about just got a temperature check on the health care delivery systems capacity for orthopedic procedure growth. I think heading in to 2023 after experiencing 2022, there were concerns around staffing shortages, et cetera, and potentially be creating a bottleneck for procedure volume growth. That clearly didn’t play out in 2023. It doesn’t sound like from your comments, it’s going to play out. You expect it to play out in 2024. But are there any capacity constraint issues in the U.S. health care delivery system for orthopedic procedure volume growth as we go forward in 2024 and 2025 or is that fully in the rearview mirror?

Josh Jennings:

Excellent. Just one follow-up on MAKO. Just with the record system placement quarter. Was hoping to just get some details on where – what you’re seeing in terms of second or even third system purchases by hospitals, hospital systems, any kind of percentage of total systems or – or how big of an opportunity do you see kind of getting that second, third, maybe even fourth system into hospitals? Thanks for taking the questions.

Kevin Lobo:

Yes, frankly, I would say it’s rare to have one MAKO in a hospital now. There are some that have five, six, seven MAKOs. I think 60% of our knees are going to MAKOs. There’s got to be a lot of MAKOs to be able to drive that kind of volume. So the days of people saying, well, this is my first MAKO, those days in the U.S. are kind of fading. That phenomenon still exists outside the U.S.

Chris Pasquale:

Thanks. Just quickly on the SERF acquisition. Are there any particular portfolio gaps you closed with that deal? Or is it more about expanding your distribution footprint internationally?

Chris Pasquale:

Okay. And then I’m curious how you’re thinking about the outlook for neurovascular in 2024. 2023 was a better year for that segment in the U.S., but it kind of got offset by international. And along with Spine, it was really one of only two segments not to grow high single digits or better. So what’s the game plan to drive better growth in that business? And do you have what you need internally? Or do you need to look for supplements to that?

Chris Pasquale:

Great. Thanks, Kevin.

Danielle Antalffy:

Hey, good afternoon guys. Thanks so much for taking the question. I’ll echo everyone’s congrats on a really strong end of the year and a strong start to 2024. Just a quick question on the orthopedics market in general. One of the things I’ve been trying to get a handle on is what’s really happening in underlying market growth. Obviously, 2023 benefited from some semblance of a backlog work down. But it seems like yourselves and your competitors – not that you have guided specifically for Ortho, but seem to be signaling higher than sort of normal, call it, pre-COVID market growth. And I’m curious, beyond pricing, what’s really changed here? Has capacity increased? We talked about ASCs. What’s changed fundamentally in the orthopedic – large joint orthopedics market that might be driving higher – sustainably higher growth versus pre-COVID levels?

Danielle Antalffy:

And I guess just to follow up on that, how much of that is Stryker specific though, because given the innovation on Stryker side, the success of MAKO and pull through there? How much is market broadly versus Stryker specific if you can even remotely quantify that?

Operator:

Our next question will come from Matt Miksic with Barclays. Your line is now open. Please go ahead.

Kevin Lobo:

Yes. Hey, Matt. Look, I can't get too specific with you, the nature of M&A. M&A is fluid and the deals have to make sense financially. You have to have the buyer that's ready to sell when you want to acquire. I think because of the pent-up demand in the businesses, we have a lot of mouths to feed and they're hungry. And so I would think in, let's say, at least the first half of the year, it'll probably be more of tucking things in that because we've been staying close to these companies and we have a bunch of deals that are teed up. But then once you get through the first half of the year, I think it becomes open field. And then open field means maybe more tuck ins, but it means maybe more things that are in the adjacency categories. We're always open to those, but a lot of things have to, stars have to align in order to be able to do those deals. But we're back on the normal Stryker offense. And again, what does that mean? It means most of the deals by number are going to be those tuck-in deals, but things like Vocera and neurovascular and those types of Physio-Control, those kinds of deals are going to pop up that are more in the adjacent categories. But I can't predict this honestly, because I don't know what's going to happen. But we are out hunting and we are excited to get back to a more regular M&A. It's been a huge part of our offense. We know how to do this. We've gotten really good acumen around evaluations and around integrations, which early in my tenure, we weren't so good at integrations. And if I look at Wright Medical, it's just been a role model for how to integrate a complex business, and the results have been stellar [ph].

Kevin Lobo:

Yes, thanks, Matt. Okay. I could spend a long time on this, but I'll just sort of cut to the chase and say that, look, things are continuing to progress in the ASC. We're now running between 12% to 15% of our hips and knees in the ASC. That's higher, certainly, than it was last year. So it continues to climb at a gradual rate because the rate limiting factor is capacity and the buildouts of these ASCs, but it is definitely continuing a steady climb. We have everything we need for orthopedic ASCs, and when I say everything, I mean booms, lights, power tools, Steri-Shield, Neptune waste management, operating table, every implant from foot and ankle to shoulder to hips to knees to spine. And I'm going to include spine in that because we just most recently did a really terrific ASC deal in spine. A lot of spine procedures are moving to the ASC. We did this in Duluth, Minnesota, which is a really exciting deal. And we were able to leverage spine in addition to a lot of other capital equipment in the ASC. And so those new builds and big renovations, we are absolutely beautifully positioned. What we're now looking at, now that we're a little bit in the GI space with Neptune and the POM acquisition that we have is, what else can we do in that space and other things we could add in that space. Now, I'm not saying that's specifically about ASC. It's about how we are. We like to be really busy in a call point, and now that we're in the GI call point, what every call point we go into, we say, what else can we bring to that call point? What other value can we bring? I'm not predicting that we'll do something in that space, but that's kind of how we look at it. But as it relates to the orthopedic ASC, we are in an incredibly good position to be able to win in the ASC market.

Caitlin Cronin:

Hi. Thanks for taking the questions, and congrats on a great quarter. Just jumping up on Matt's question earlier. Momentum in spine really seems to be strong. Do you have any more clarity on how much you've been able to capitalize on the disruption in the space or expect to kind of capitalize from the disruption?

Caitlin Cronin:

Got it. And then just a quick one on MAKO shoulder. You noted great feedback from docs. What's kind of going to be the use case for the docs? Is it going to be outcomes, time saving, et cetera?

Operator:

Our next question will come from Steven Lichtman with Oppenheimer. Your line is now open. Please go ahead.

Glenn Boehnlein:

Yes. It's Glenn. So as we look at price, first of all we've really honed in a strategy and a group that solely focuses on pricing for the whole company. If we think about sort of the segments, I don't think you'll see a lot of different performance in what we see out of our segments in general. MedSurg and Neurotech has more of an ability to gain pricing and we see price increases in those businesses. And honestly, even before the pandemic, we would see price increases coming out of the MedSurg businesses. I would say on the Ortho side, the trend has really been that it's just been less negative. Also, if you think about those ortho contracts, they're generally three-year contracts. So we haven't really been cycled through all those contracts yet. We have real discussions around inflation in our business with our customers. They know it, their experience it themselves. And so we're just – I'm not expecting to see positive come out of the ortho side, but we'll probably continue to see less negative.

Glenn Boehnlein:

Yes. No, good question. As we think about 2024, there is an impact for us. I think that through our tax planning and other strategies, we feel like we have fully offset that impact, and that's included in our effective tax rate guidance. For 2025, it's just – it's too early to comment at this point, to be honest. It's something we're just starting to look at, and we'll have more on that probably a year from now.

Mike Matson:

Yes. Thanks. It sounds like you're looking at doing some more M&A here. I was just curious if you could remind us where your leverage ratio is? And if you have a target at the – how high you'd be willing to go there?

Kevin Lobo:

Yes. And so keep in mind that 3 is not necessarily an upper limit, right? So that's a normal landing zone for us, this 2.5 to 3 for the right deal at the right price. Could we go higher than 3? Sure, we would. And we have obviously have to commit to paying down the debt. But we don't really look at us as sort of being constrained that way. So for the right asset, if it's going to be value-creating for Stryker, we are not afraid to push beyond the 3, but that's kind of the land we like to live in as a landing zone.

Kevin Lobo:

I am so glad you asked about sports. It's absolutely a rocket ship of growth for us for the past five, six, seven years. They have a number of shoulder launches coming out this year, I believe, four different shoulder launches. They call it internally this shoulder [indiscernible], which is quite motivating. But we've done a terrific job with hip. We've had a terrific job with knee, but shoulder has been kind of the area that we've needed to have new products. But they've been just an amazing business. It was a startup 12 years ago, and it just become a big, fast-growing business. It's really helped us win ASC deals. Frankly, having a really every ASC deal is orthopedic, ASC deal involves sports, and because we have such a strong portfolio we are able to win those deals. But historically, we wouldn't have been able to, and it's an incredibly exciting year of new product launches, particularly in shoulder. And I think some of those hopefully might be shown in AAOS, I'll have to get back to you on that. But I'm very bullish. We have a fabulous leader who's been leading the sports medicine business since the start-up when we had just a camera and not really much in the way of implants. And we are now formidable in sport medicine. Certainly in the U.S., certainly in Europe, we still have work to do in the emerging markets in Asia Pacific, but really a fabulous business. And it's been part of the growth engine within Endoscopy. And you've seen Endoscopy post pretty impressive results, certainly last year and this year.

Drew Ranieri:

Hi. Thanks for taking the questions. I'll put both of mine together. But Kevin, you were so early on in the orthopedic robotics landscape just with soft tissue robotics. What are your kind of your current thoughts on supporting that ecosystem today versus entering soft tissue robotics? Is it something that's concerning you? Or just how are you thinking about that opportunity? And then second, just could you talk about the PROstep launch from earlier in the fourth quarter or late third quarter? Just any metrics you can kind of share there on the foot business? Thank you.

Operator:

Our next question will come from Matt Taylor with Jefferies. Your line is now open. Please go ahead.

Kevin Lobo:

I mean, first of all, it's heavily dependent on sort of the mix that we get if we over deliver on sales in terms of how much margin we can get to. I would say that 200 basis points expansion is the absolute goal, and that will be the target. And we get there a little sooner, so be it. But we won't take our – our eye off of making sure that we're doing what's right in the business so that we can deliver that 200 basis points.

Kevin Lobo:

Yes. Great. Listen, I – integrations are challenging. In this one, we had some challenges with the cloud. We had to restructure the sales force. We are already seeing terrific integration with both beds and now more recently with our wireless stretcher. We had – they had a list before we bought the company, and we've expanded that list of connecting products and those products that we're going to connect to the ecosystem are not just Stryker products. So there are third-party companies that are coming to us and asking to be connected to our ecosystem. So we want to be a vital resource within hospitals. We're even looking at emergency departments that don't have really well automated workflow that actually do the documentation that take cognitive load off of nurses. So the potential every day, it just keeps expanding and expanding it. So it's wildly exciting. And the team now – the new sales team is really, really pick up in a big way. And so we're super excited. We're not ready – ready to talk about which products we'll be integrating. We'd rather do the integration and tell you about it. And we'd like to sort of give you a full year update. So a year from now, I expect we'll give you kind of a wholesome update and include more of those products that will be attached to the ecosystem. But we are really, really excited about this acquisition. It's a platform. So I'd say after MAKO, this is the second platform acquisition that I've done during my tenure. The other deals we've done, none of them were platforms. And that means it has wild upside potential over time. Now it's not going to happen overnight. It's going to take time. But this is – for us is – it will be very sticky in hospitals. It will just be a renewal, recurring revenue. And then as you add more and more to the ecosystem; it becomes something that hospitals can't live without. So that's our dream, and we're pretty optimistic given where we are right now, given the momentum that we have, given the interest that we have, both from parts of Stryker as well as third-party companies wanting to integrate to the system.

Operator:

Our final question will come from Richard Newitter with Truist Securities. Your line is now open. Please go ahead.

Kevin Lobo:

Yes. Thanks, Rich. Thanks for the question. Look, I think back to 2017, 2018, 2019, we were expanding margins before some dilution. We have around 80 basis points. And we were not growing at this kind of growth rate, right? We were growing in the 6s and 7s organically, not double-digit growth organically or high single-digit growth organically. So with that higher growth, this is not a crazy level of margin expansion that we think we could do. But doing small deals. And if they're small tuck-in varieties, there's some dilution that will come with that. We expect we're going to eat that and be able to deliver the 200 basis points. If a deal came along, let's say, something like a MAKO, which, as you know, occurs once a decade, maybe. It's not an everyday occurrence. That had dilution, but we felt it was just so great for the company that we had to do it. We would go ahead and do it. And then we would look at our numbers and say, is this something we can absorb or isn't it? Our going-in assumption is that that's not a likely occurrence. It's not impossible though. And I never want to rule anything out when it comes to M&A. If something really delicious appears and we think that this is going to be great for our future, we're going to go ahead and do it, and then we'll do our math and figure out can we get there with the 200 basis points. But in the normal cadence of operations of Stryker – and that means doing a number of deals that have a little bit of dilution here or there – we're going to eat it and we'll deliver our 200 basis points. If something bigger happens like a MAKO, as you know, was very dilutive but has proven to be a pretty terrific asset for our company, we're not going to say, well, we're going to wait two years and then we'll do it later. We're going to go ahead and do it. But again, I don't see that on the horizon. It's not obvious to me. But I'd never want to rule that out. It would be foolish, frankly, to be beholden to a certain financial target and pass up what could be very value creating for our company. But again, it's not our current frame of mind, not our current thought process. But I don't want to rule out that that could be a possibility.

Kevin Lobo:

Thank you all for joining our call. As you can see, we have terrific momentum as we finish the year. We're excited about 2024, and we look forward to sharing our first quarter results with you in April. Thank you.

Kevin Lobo:

Welcome to Stryker's third quarter earnings call. Joining me today are Glenn Boehnlein, Stryker's CFO; and Jason Beach, Vice President of Investor Relations. For today's call, I will provide opening comments followed by Jason with the trends we saw during the quarter and some other product updates. Glenn will then provide additional details regarding our quarterly results before opening the call to Q&A. Before I discuss the quarter, I would like to address the concerns around GLP-1 and what is being misunderstood. Our knee business is not at risk for a slowdown. There is an oversimplification taking place as it relates to the relationship between weight and knee replacements. This ignores the more important aspects of activity level and genetics. We are, in fact, optimistic about the positive impacts of these drugs in both the short term and the long term. In the short term, it will help to make ineligible people eligible for 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 knees representing about 10% of our sales. Now moving to our third quarter results. We delivered strong organic sales growth of 9.2% against last year's nearly 10% comparable despite one less selling day versus 2022. This performance included double-digit growth in MedSurg and Neurotechnology and high single-digit growth in 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 remain focused on our pricing initiatives, once again realizing positive overall price. We delivered quarterly adjusted EPS of $2.46, reflecting a 16% growth compared to the third quarter of 2022. This result was primarily driven from the strength of our sales but also demonstrates continued margin recovery. Finally, we are narrowing our expectations for 2023 to the high end of our previously provided guidance ranges and now expect full year organic sales growth of 10% to 10.5% and earnings per share of $10.35 to $10.45 per 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 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.

Glenn Boehnlein:

Thanks, Jason. Today, I will focus my comments on our third quarter financial results and the related drivers. Our detailed financial results have been provided in today's press release. Our organic sales growth was 9.2% in the quarter, the third quarter of 2023 had one less selling day than 2022. The impact from pricing in the quarter was favorable by 0.3%. We continue to see a positive trend from our pricing initiatives, particularly in our MedSurg and Neurotech businesses, almost all of which contributed positive pricing for the quarter. Foreign currency had a 0.3% favorable impact on sales. In the quarter, U.S. organic sales growth was 9.3%. International organic sales growth was 8.9% and impacted by positive sales momentum across most of our international markets, particularly Australia, Europe and emerging markets. Our adjusted EPS of $2.46 in the quarter was up 16% from 2022 driven by higher sales, operating margin expansion and a lower adjusted income tax rate, partially offset by the impact of foreign currency exchange, which was unfavorable $0.02. Now I will provide some highlights around our quarterly segment performance. In the quarter, MedSurg and Neurotechnology had constant currency sales growth of 10.3% and organic sales growth of 10.1% which included 10.9% of U.S. organic growth and 7.4% of international organic growth. Instruments had U.S. organic sales growth of 17.3%, and 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 surg 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 comparable -- growth comparable in 2022 of almost 14%. Medical continues to have a large backlog of capital orders, and we expect a solid Q4 despite a huge Q4 comparable. Neurovascular had 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 3 business units, neurosurgical, CMF and ENT. Internationally, MedSurg and Neurotechnology had organic sales growth of 7.4% and reflecting double-digit growth in our instruments, endoscopy and neurocranial businesses. Geographically, this included strong performances in Australia, Europe and most emerging markets. Orthopedics and 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 HIF growth fueled by our insignia hip Sam. 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% per 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 Mako 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 by 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 cost 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 $0.10 to $0.15 per share for the full year, both of which are included in our guidance. Based on our performance in the first 9 months of the year, together with our strong sales momentum, we now expect adjusted earnings per share to be in the range of $10.35 to $10.45 per share. And now I will open up the call for Q&A.

Lawrence Biegelsen:

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 in 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 rate beyond '23. Anything we should be aware of with Stryker. And I had one quick follow-up.

Lawrence Biegelsen:

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 to next week at the analyst meeting. So I don't -- I know you're not going to front run that. But my question is, how much visibility do you have? And what's driving that getting back to pre-COVID margins?

Operator:

The next question comes from the line of Robbie Marcus from JPMorgan.

Kevin Lobo:

Yes, sure. I'll take this question. I would say we did see what I'll call the more normal seasonality after the last few years of turbulence, starting with the pandemic. And so what that means is we think Q4 is going to be strong, seasonally strong as it was going back to '17, '18, '19. We're already seeing that kind of with the month of October. So I think we're doing fine. Our business is -- 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.

Kevin Lobo:

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

Philip Chickering:

It's Pito. On the margins. I realized that you're not giving us margins sort of for 2024 yet. So focus on the third quarter gross margins. Can you bridge us on how you grew 220 basis points year-over-year. And how that compares to the guidance last quarter about gradual margin improvement. Are there any one timers in there? Because you're already sort of within 100 basis points of where you were in third quarter '19.

Philip Chickering:

Okay. And the follow-up question, like you talked about a big backlog in medical. Are you seeing hospital CapEx continue to grow as margins improve from hospitals? Or are you seeing any impact in the rising rate environment and/or additional pressure on physician compensation changing of hospitals to CapEx in the near term?

Operator:

The next question comes from the line of Joanne Wuensch from Citibank.

Kevin Lobo:

Okay. Great. Thanks, Joanne. What we've always said about a 1-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 today. The full year will be the same number of days. What we said around the timing is we expect Mako spine kind of around the middle of the year next year. That's on track. We were able to show that to some surgeons at NASS and got very good feedback on that. And that product will obviously be -- there will be a Mako application, which I've gotten to see, which is terrific. But it will also include an additional product that's coming out of our insurance 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 time lines we communicated previously, and we are pacing on track on both of those products.

Vijay Kumar:

Kevin, maybe on that 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 shorter market?

Vijay Kumar:

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

Vijay Kumar:

Great. Sorry. On free cash, would that normalize for next year?

Operator:

The next question comes from the line of Shagun Singh with RBC.

Kevin Lobo:

Yes. Shagun, thanks for the question. We really haven't been in the habit of providing breakouts of the impacts of new products. it really is why we drive at the high end of med tech, why we consistently outperform the market by roughly 300 basis points. That's the formula. Consistent cadence of new products combined with really great sales force execution through our decentralized business units. That's the Stryker 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 electronic 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 2 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 outperforming 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. And we're not going to get into parsing those elements. But rest assured that, that is the engine of growth for our company.

Kevin Lobo:

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

Ryan Zimmerman:

I want to dovetail on Shagun's Cajuns question and also Larry's earlier question on '24 and asking the way, I appreciate you guys have always been at the higher end of med tech. But Kevin, when you think about some of the puts and takes that you've outlined, be it robust orthopedic demand, 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 what we think of as historical net debt growth rates in that 4% to 5% range.

Ryan Zimmerman:

Okay. I had to try it in a different way. So I appreciate it. All right. I'll turn -- I'll shift directions then. And just ask, 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 from Mako that is in ASCs today. And I'm wondering where you see that market topping out at or where you see from a socket perspective? I mean if there'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 thought -- as we've seen the ramp of Mako, I mean, initially, it was maybe 2,000 hospitals and then it was potentially all 5,000 hospitals in the U.S. it's early days in ASC, but where do you think that can go over time as you sit here today?

Operator:

The next question comes from the line of Matthew O'Brien with Piper Sandler.

Kevin Lobo:

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

Kevin Lobo:

Yes. Thanks. Look, I'm not going to use today's call for this because we have an Analyst Day next week in 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, our nonsense. And here at the August 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.

Eric Anderson:

This is Eric on for Josh. 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 rev hires? Any detail there would be great.

Eric Anderson:

Understood. 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 organic growth?

Glenn Boehnlein:

Yes, I think we -- 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.

Travis Steed:

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

Travis Steed:

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

Operator:

The next question comes from the line of Richard Newitter from Truth Bank.

Kevin Lobo:

Yes. Listen, yes, we're targeting kind of, let's call it, Q3 for the spine robot on Mako. What I'd say is that we -- the Mako launch for spine will be for Pedicle group 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 the 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 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.

Kevin Lobo:

Look, I'm not sure we're going to tell you a lot more about it next week, but we're big believers. And well, the term we use is mistreality so that we 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 time lines 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.

Andrew Ranieri:

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

Andrew Ranieri:

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

Operator:

The next question comes from the line of Danielle Antalffy with UBS.

Kevin Lobo:

Yes, sure. Listen, I'm super excited about international. As you know, we've now hadfive 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, Mako is only just starting to really gain steam in a lot of international markets. Our camera business is gaining steam in the international market. So I think we're really poised and next week, we -- as part of our agenda, we have an international panel that we're going to hold. 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.

Operator:

The last question comes from the line of Matt Taylor with Jefferies.

Glenn Boehnlein:

Sure. You're right. Q3 kind of continued our favorable pricing trend with sort of 0.3% coming off of Q2, that was 0.5%. And A couple of comments I would say. As we look at the full year, we think that will be positive for the full year. And we also have put in place kind of the incentive process as well as the contracting process to really make sure that we're considering price as we think about working with our customers on buying products. So I feel good that we have the sort of mechanism that is going to continue to look at price. That being said, you're absolutely right. We'll anniversary on product over product year-over-year, which may make things a little bit tougher. One thing that I would keep in mind though, that Kevin talks about this product super cycle and a lot of next-gen products coming out. So if you think about our pricing calculation of 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 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.

Kevin Lobo:

Yes. Listen, we have a very dedicated sales force offense that we run. So even before you think about spine or shoulder, even within joint replacement, we had specialized capital salespeople. We have the same thing with power tools. We have specialized people that sell power tools. So we don't believe in this hybrid model, we're going to have dedicated capital reps, and they will go to the market and they will sell to competitive and new surgeons right out of the gate. That's what they do. And that's what we do at Stryker. So I wouldn't expect that we would just go to our friendlies. We're going to go to people that want technology, and we really don't care if they're existing customers or if they're competitive customers because the -- 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.

Kevin Lobo:

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

Kevin Lobo:

Welcome to Stryker’s second quarter earnings call. Joining me today are Glenn Boehnlein, Stryker’s CFO; and Jason Beach, Vice President of Investor Relations. For today’s call, I’ll provide opening comments, followed by Jason with the trends we saw during the quarter and some other updates. Glenn will then provide additional details regarding our quarterly results before opening the call to Q&A. In the second quarter, we delivered organic sales growth of 11.9% with double-digit growth in both MedSurg and Neurotechnology, and Orthopaedics and Spine. This comprehensive performance demonstrates the diverse and attractive markets that we play in and our ability to drive growth through strong commercial execution. We are also pleased with the continued positive outcomes of our globalization efforts. Our international business demonstrated strong performance with double-digit growth, complementing our strong and fast-growing U.S. business. In addition, we continue to see traction with our pricing initiatives, again delivering positive pricing in the second quarter. During the quarter, we continued to realize improvements in component availability, although disruptions remain in parts of our business. Our teams have demonstrated good agility in addressing these situations, proactively mitigating much of their impact. We delivered quarterly adjusted EPS of $2.54 a share, reflecting 13% growth compared to the second quarter of 2022. This result was primarily driven from the strength of our sales but also marks the beginning of our margin recovery. We expect margins to continue to expand throughout the remainder of the year. Finally, with half the year behind us and our solid momentum, we have increased our expected full year organic sales growth to a range of 9.5% to 10.5% and increased our expected earnings per share to $10.25 to $10.45 per share. I will now turn the call over to Jason.

Glenn Boehnlein:

Thanks, Jason. Today, I will focus my comments on our second quarter financial results and the related drivers. Our detailed financial results have been provided in today’s press release. Our organic sales growth was 11.9% in the quarter. The second quarter’s average selling days were in line with 2022. The impact from pricing in the quarter was favorable by 0.5%. We continue to see a positive trend from our pricing initiatives, particularly in our U.S. MedSurg and Neurotech businesses, all of which contributed positive pricing for the quarter. Foreign currency had a 0.7% unfavorable impact on sales. In the quarter, U.S. organic sales growth was 12%, International organic sales growth was 11.4%, impacted by positive sales momentum across most of our international markets, particularly Australia, Canada, Europe and most of our emerging markets. Adjusted EPS of $2.54 in the quarter was up 12.9% from 2022, driven by higher sales and operating margin expansion, partially offset by a higher adjusted income tax rate and the impact of foreign currency exchange, which was unfavorable $0.03. Now, I will provide some highlights around our quarterly segment performance. In the quarter, MedSurg and Neurotechnology has both constant currency and organic sales growth of 12.9%, which included 13.5% of U.S. organic growth and 10.9% of international organic growth. Instruments had U.S. organic sales growth of 12.9%, led by strong double-digit growth in the Surgical Technology business. From a product perspective, sales growth was led by power tools, waste management, smoke evacuation and surge account. Endoscopy had U.S. organic sales growth of 3.5% against a strong comparable. This included strong growth in its ProCare sustainability and sports medicine businesses. The Endoscopy business completed its limited launch of the 1788 camera late in the second quarter. Consistent with prior camera launches and the related transition period between the legacy camera and the new camera, this also contributed to muted growth in Q2. Medical had U.S. organic sales growth of 27.2%, reflecting very strong performances in all three of its businesses, acute care, emergency care and Sage, and benefited from continued improvement in product supply during the quarter. Neurovascular had U.S. organic sales growth of 9%, reflecting a strong performance in our hemorrhagic business. Neuro Cranial had U.S. organic sales growth of 9.6%, which included double-digit growth in our Bone Mill, bipolar forceps and Max Space product lines. Internationally, MedSurg and Neurotechnology had organic sales growth of 10.9%, reflecting double-digit growth in our medical and Neuro Cranial businesses. Geographically, this included strong performances in Europe, Australia and Canada. Neurovascular’s growth continues to be negatively impacted by VBP in China. Orthopaedics and Spine had both constant currency and organic sales growth of 10.6%, which included organic growth of 10% in the U.S. and 12.1% internationally. Our U.S. Knee business grew 10.6% organically, which reflects our market-leading position in robotic-assisted knee procedures. Our U.S. Hip business grew 8.8% organically, reflecting strong primary hip growth fueled by our Insignia hip stem and continued procedural growth. Our U.S. Trauma and Extremities business grew 14.3% organically with strong performances across all businesses led by very strong growth in upper extremities and foot and ankle. Our U.S. Spine business grew 5.2%, 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 declined organically 1.6%, primarily driven by the impact of deal mix changes, specifically more rentals related to Mako installations in the quarter. Internationally, Orthopaedics and Spine grew 12.1% organically, including strong performances in Australia, Canada and most emerging markets. Now, I will focus on operating highlights in the quarter. Our adjusted gross margin of 63.9% was favorable, approximately 60 basis points from the second quarter of 2022 and 70 basis points sequentially compared to Q1 2023. This change was primarily driven by the slight easing of certain cost pressures, decreases in spot buy purchases, improved productivity and the benefit of price, partially offset by the impact of foreign currency exchange. Adjusted R&D spending was 6.4% of sales, which represents an 80 basis points decrease from the second quarter of 2022, due primarily to a higher comparable in 2022 related to the ramping of costs for product launches. Our adjusted SG&A was 33.1% of sales, which was 70 basis points higher than the second quarter of 2022, due to a disciplined ramp of spend and investment to support our growth. 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 24.3% of sales which was approximately 60 basis points favorable to the second quarter of 2022. This performance is primarily driven by the aforementioned easing of certain cost pressures, primarily on gross margin. Adjusted other income and expense of $66 million for the quarter was slightly higher than 2022, driven by increased interest expense. The second quarter of 2023 had an adjusted effective tax rate of 15.2%, reflecting the impact of geographic mix and certain discrete tax items. For 2023, we reiterate our full year effective tax rate guidance to be in the range of 14% to 15%. Focusing on the balance sheet. We ended the second quarter with $1.5 billion of cash and marketable securities and total debt of $12.9 billion. Approximately $100 million of the term loan debt was paid down in the quarter, reflecting year-to-date payments of $200 million and a remaining balance of $650 million. Turning to cash flow. Our year-to-date cash from operations is $1.1 billion. This performance reflects the results of net earnings and higher accounts receivable collections. Considering our year-to-date results, our strong backlog for capital equipment and continued positive procedural trends, we now expect full year 2023 organic sales growth to be in the range of 9.5% to 10.5% with pricing to be slightly positive for the year. If foreign currency exchange rates hold near current levels, we anticipate sales will be unfavorably impacted by approximately 0.3% and adjusted EPS will be unfavorably impacted from $0.05 to $0.10 per share for the full year, both of which are included in our guidance. Based on our performance in the first half of the year, together with our strong sales momentum, we now expect adjusted earnings per share to be in the range of $10.25 to $10.45 per share. And now I will open up the call for Q&A.

Robbie Marcus:

Congrats on a great quarter here. Two for me. First, a great quarter. It looks like you’re raising more than the beat on both the top and bottom line. Looks like you’re taking a good amount of share still in Ortho across hips, knees and extremities, trauma. Just as we think about the balance of the year, you touched on some of them, but would love to get a sense of what gives you the confidence these elevated trends are going to continue. And any visibility on the margin side that gets you comfortable moving it up more than the beat?

Glenn Boehnlein:

Yes. Hey Robbie. As we got through the quarter, as I mentioned, we really started to see some positive and easing of some of the cost pressures that we had felt in Q1 and certainly last year. I think we also are starting to feel some of the improvements in supply chain. That’s not to say that everything is rosy. We are still feeling inflationary pressures in transportation, some of our commodities, labor, certain electronics. But I will say that spot buys in Q1, spot buys in Q2 have not been material. And we’re getting near the amortization of the impact of spot buys from last year. So I feel like that gives me good confidence that I think we’ll see continued improvement in our gross margin as we move into Q3 and Q4. And so, we really will feel that gradual improvement, and we’ll feel it all the way down to the op margin line.

Kevin Lobo:

Well, I think Jason’s comments in the openings say we do expect the procedural positive trends to continue well into next year. I don’t have a crystal ball exactly, will that be 100 basis points or 200 basis points more elevated than it was back through the pandemic in last year. So -- but we expect that to be elevated. The super cycle of products is widely exciting, something like -- look at Neptune S is off to a great start within instruments, the 1788 [ph] is only going to start kind of the latter part of this quarter. So, that’s going to b a big impact next year, got a new defibrillator coming that’s more next. So, these are launches, ProCuity is multiple year. We have the stair chair of the Xpedition. Amazing product that medical launch brand new and it’s new category altogether that launched Q1 of this year, that will continue into next year. So, a lot of continuation of really strong growth across our businesses. So, you should expect what -- going to continue to be a high-growth company going into next year. Yes. Let me just -- sorry, let me finish. I forgot it was a long question. So yes, we are absolutely committed to returning to pre-COVID margins and then growing our margins thereafter. This quarter marked a really important step, a very big first step in that evolution.

Larry Biegelsen:

Thanks for taking the question. And I’ll echo Robbie’s congratulations on a very impressive quarter here. So Kevin, I wanted to start on MedSurg, the new products. Just talk about how the new camera in endoscopy might have impacted Q2? And what you expect the impact to be from that in ‘23 and ‘24? And Medical growing 27% organically after Vocera anniversaried. What drove that? And how did Vocera do in the second quarter? And what’s the outlook? And I had one follow-up.

Larry Biegelsen:

Thank you. And just I’ll keep my follow-up really brief. Glenn, the comps are very different in Q3 and Q4. Should we be thinking about stronger growth in Q3 relative to Q4? Just the cadence for the rest of the year? Thank you.

Operator:

We’ll take our next question from Pito Chickering with Deutsche Bank.

Jason Beach:

It’s Jason. I’ll start here and then maybe some follow on. But as we think about the capital environment, we continue to see great strength from a capital environment standpoint. And even as you think about the backlog in our business, I think your question was, was there a bolus. But if you look at our backlog, it continues to be at very high levels, higher than what we came into the year with. So, still strength there on the capital side.

Glenn Boehnlein:

Yes. I think the big thing that really sits in inventory and worked its way through sort of in the first quarter and the second quarter was the impact of those spot buys. And generally, inventory turns depending on the product, anywhere from 6 to 9 months. So yes, we will generally see the impact of spot buys reduced for the rest of this year. Keep in mind that we still have this sort of inflationary headwind that we will be working against in Q3 and Q4. But just the mere fact that I feel like we’re getting to the end of the impact of spot buys, gives me confidence that we should see gradual gross margin improvement in the rest of this year.

Vijay Kumar:

Kevin, the guidance is pretty impressive, 10% organic. Are comps something that we should worry about from a fiscal ‘24 perspective? I know you mentioned certain product tailwinds. Just help us contextualize that 10%. And given that some of these procedure trends, it looks like it could sustain into ‘24.

Vijay Kumar:

That’s helpful, Kevin. Glenn, maybe one for you. It looks like we’re on track, actually well north of 50 basis points of margin expansion in fiscal ‘23. Is this something that’s sustainable when you look at the operating model, assuming there’s nothing crazy on the inflation side for next year. I’m curious how we should be thinking about leverage.

Kevin Lobo:

Yes. The one thing I would add, so Glenn wasn’t necessarily referring to ‘24, when you said 30 to 50. We’re on a ramp and on a major focus to get back to that 26.3%. And then thereafter kind of get into a normal rhythm. So, we’ll give you more clarity around that at the Analyst Day in November.

Matthew O’Brien:

I really don’t want to make too much out of one quarter here. But when I look at the two-year stacked growth rate for you guys versus your biggest competitor in hips in knees, you had been outperforming them massively in the last several quarters. This quarter, it really tightened up the delta between you two, specifically in knees. So I’m just wondering if there’s anything you’re seeing competitively, maybe in cementless or on the robotics side, that you should call out or that we should think about as you go forward, just in terms of being able to significantly outperform the market in hips and knees over the next year or so?

Matthew O’Brien:

I appreciate that, Kevin. And then on the pricing side, I know it’s now flipped from kind of a headwind this year to a tailwind. But I’m assuming we’re working through some of those benefits. So, is pricing going to be another tailwind or positive for Stryker into ‘24 and even ‘25 as well as you’ve got these long-term contracts? Thanks.

Operator:

We’ll take our next question from Ryan Zimmerman with BTIG.

Kevin Lobo:

Yes. So the first thing I’d say is that Cerus has not yet approved in the United States. So, that 9% growth had no benefit from Cerus, right? So I think you know that. I just want to make that clear to everybody that the trials are ongoing right now. We look forward to that approval in the United States. We’ve launched two new products. We had a Tetra small coil as well as 46 catheter -- 46 size catheter, Vecta catheter. So two new products that helps in terms of driving the hemorrhagic growth. And the U.S. has been a little bit of a challenge for us more if you look back at the last few quarters, and really pleased to see that step up in this quarter, and we’re very excited that -- and we closed the deal. Obviously, it was during the quarter. It hasn’t had been a big impact at all. But a lot of excitement at the product we know performs extremely well based on what’s happening in OUS, and we can’t wait for the approval. It’s definitely going to be a shot in the arm when it does happen in the United States.

Kevin Lobo:

Yes. Great. Nothing new to report. We’re kind of on schedule with what we had said before. Spine in the back half of next year and shoulder towards the end of next year. And frankly, we’re not really concerned about competitive activity in this space. We already know Globus and Medtronic have robots in spine. We are really excited about our overall enabling technology starting with Q Guidance. We have an additional product that we’ll be launching and Mako Spine. So, by the end of next year we’ll have a really compelling suite of enabling technology tools for Spine, which we’re really excited about. If someone else is first in shoulder it doesn’t concern me in the least. We have Blueprint already. We already have a very powerful enabling tech platform for shoulder, whether it’s patient matched ID, whether it’s using HoloLens to do the procedure with virtual reality, whether it’s the Blueprint technology, which is amazing. And we’re going to use that amazing Blueprint technology to feed Mako, and that will just be icing on the cake on an upper extremity business that is cooking on gas right now with amazing growth quarter after quarter after quarter.

Shagun Singh:

I was just wondering if you could refresh us on your capital allocation priorities and M&A just in terms of deal size valuation in areas of interest? And then on the product side, if you could just touch on trauma and what’s driving the strong growth there and the durability? Thank you.

Jason Beach:

Trauma.

Operator:

We’ll take our next question from Josh Jennings with TD Cowen.

Kevin Lobo:

Yes. Listen, I think smart implants is interesting. We obviously have MotionSense which is a wearable on the outside to measure basically similar dynamics that are going to be measured from the smart implant. So I think range of motion, all these factors, it’s interesting. We’re not quite sure yet what to do with that data. How compelling that will be, will that affect patient selection? Will it affect approaches to procedure? So I would call it something that is more investigational and more of a learning that we’re going to have. And -- but I do think it’s something that could be important in the future. So not discounting it. I don’t have anything more to share on OrthoSensor other than we are -- we have launched MotionSense, which is the wearable which attaches to both the femur as well as tibia to track mobility and a range of other metrics. And we’re going to learn a lot, we will and so others in the industry about what is it that really matters that you’re measuring in the post-surgery period, and really how does that affect the patient care, patient -- maybe patient selection, maybe what implants they should be using, is there a feedback loop that’s meaningful. We don’t know -- we don’t have answers. We have a lot of questions, and it’s going to give us new data that we can then learn from. So that’s how I’d characterize at the moment.

Matt Miksic:

I wanted to ask a question on Mako, one of the comments that you made, and I apologize if this came up already, hoping back and forth really, because a lot of folks tonight and different calls. But you mentioned an increase in deal mix, I guess, an increase in rental deal mix affecting the dollar revenues that came in from Mako in other -- this quarter. And that’s something we’ve heard from other folks as well as you’re I’m sure aware in terms of robots, more sort of hospitals taking a flexible option to leasing or as-you-go arrangements for robots. First, I’m wondering how tightly correlated that with sort of growth in the ASC? And the second, in the past, Kevin, I think you talked about like early on, well, some hospitals are capital rich, some hospitals are operating in commercial and have endowments or whatever, there’s different hospitals have a different preference on how they want to pay for -- that was sort of like how we used to think about this. I’m curious whether you’re seeing sort of hybridization of that? In other words, we want to know Mako, you could pay for it, but let’s scale into it, with a lease arrangement or something. I’m wondering if you’re seeing that kind of shift in the market. And I have one follow-up, if I could.

Matt Miksic:

That’s great. And just quickly on -- you mentioned endoscopy later in the camera and not really having an effect yet, but quite differentiated and quite different this cycle with the sort of opportunity to test surgical margins around tumors and things that really represent kind of a new phase of sort of camera and imaging functionality. Any sense -- I know it’s early but -- of what that does to the shape of this product cycle versus what we’ve experienced in the past? I mean fluorescence imaging was pretty big for you in the last launch, this sort of takes that up a notch, just any color you can provide in terms of what your expectations are and the early interest, et cetera, on the camera side.

Operator:

We’ll take our next question from Joanne Wuensch with Citibank.

Glenn Boehnlein:

Yes, Joanne, we -- yes. We really -- if you think about operating margins, especially our performance in Q2, we saw a really sort of good improvement, honestly, in gross margin just in terms of some easing of some of the cost pressures, as I’ve mentioned before, spot buys are not material. They weren’t material in Q1, and they’re not material in Q2. I think the other thing, too, that we’re feeling is just that now that we have more evening of supply, we’re also back to sort of better productivity gains. And so all of those things give us good confidence that we should see gross margins improve in the back half of this year, and they’ll gradually improve because we’re still feeling some of this inflation, but that kind of gives us the confidence. And obviously, some of that will roll into next year as you think about our performance for next year. But we -- at this point, we’re not going to guide on that other than to say that we do think we’ll see some gradual improvement for the rest of this year.

Kevin Lobo:

Yes, Joanne, earlier in the call, I think this question was asked, I’ll just repeat that we are laser-focused on, I would say, trying to sprint back to the 26.3% that we had in 2019. And so we’re going to try to move margins on a more ambitious way to get back to that. And then once we get back to that kind of level, I think you’re going to see us wanting to expand margins in a kind of a more consistent way. I don’t know the exact number, something like 50 bps. We’ll get more specific as time passes. But more like an annual, more moderate, nice progression year after year after year, especially with this kind of high growth that we’re experiencing organically. You’re going to expect to see more normalized margin expansion. But in the meantime, we’re looking to move at a faster clip given the falloff that we’ve had since ‘19 and try to restore those margins.

Rick Wise:

Kevin, I was hoping you would just give us a little more color and perspective on really your very solid international performance double digits, obviously, almost the as strong as U.S. performance, but a little slower than the first quarter’s pace. You highlighted the strong emerging markets. How -- I’m just going to ask one question with a couple of parts. How sustainable is this? You talked about some of your key initiatives? And just maybe just your perspectives on the sustainability, what’s the drivers here? And maybe where we are in terms of procedure volume recovery back to normal in Europe just in a larger picture sense? Thanks so much. And great to see the excellent quarter.

Operator:

We’ll take our next question from Travis Steed with Bank of America.

Kevin Lobo:

Listen, sorry, your sound quality was a little hard hearing you. I think you’re asking about July if we saw something strange seasonality in July. And look -- we don’t normally comment on one month. And I would tell you -- you saw our raised guidance like we’re expecting a pretty good second half of the year. And I don’t really want to get into one month. And the -- sometimes you do have certain dynamics that happen. But there’s nothing really important that I want to call out for the month of July. And then I think the second part was margin.

Travis Steed:

Yes, sorry. I’m just curious if the second half of this year is kind of the new jumping off point for margins going forward, just given that this is a more normalized cost environment in the second half?

Operator:

We’ll take our next question from Danielle Antalffy with UBS.

Kevin Lobo:

Yes. Look, the trends aren’t different than what we’ve seen in the past. It’s surgery demand backlogs of surgeons that people -- frankly, the older patients who’ve been -- now really want to get procedures done, there are more active people out there, as I kind of referenced earlier, who want to get their procedures done. So innovation wins the day, right? So the robotics continues to be a real terrific for us, and we continue to see increased utilization. Percent of Mako procedures done continues to rise. Percent of cementless continues to rise. Percent of hips being done on Mako continues to rise. So that’s not new. Those are a continuation of prior trends. And so there isn’t some kind of new dynamic. It’s just the pent-up demand of patients that we kept waiting for, they’re coming and they’re going to continue to come for some period of time. And the aging population, people every day, some 10,000 turn 65. And so there is demographics that are on our side. There is the hangover from COVID that’s on our side. And for Stryker, we have a portfolio that we’re really excited about. In addressing the Direct Anterior with our Insignia stem was critically important, and we’ve done that, and we’re seeing fantastic uptake of that hip stem, which is driving terrific growth in hips. So that’s kind of new for us as to -- if you look in the last year, our growth has really picked up, and that was really because of the product that we launched really addressing an important and growing segment of the procedures in hips.

Kevin Lobo:

Look, we really like our chances. A huge demand for Mako hasn’t stopped. We know we have the best system on the market, which we’re really excited about. We’ve filled our gap with Insignia on the hip side. We have an awesome 3D-printed hip cup with Trident II. We have the cementless offering, which, of course, we’re way ahead, a huge head start on cementless. Terrific publications coming out with excellent five-year data on cementless, which will give surgeons even more confidence in that in the future. And so there’s other things the team are looking at. We have some really exciting products -- our hinge product that we’re going to come out with later this year to shore up revision. And that’s pretty exciting. We have plans to have revision on Mako as well in the not-too-distant future. So we’re not going to sort of sit tight on just everything we’ve already done. There are incremental additions. We just not so long ago launched that 2.0 software for -- to improve the user experience, improve the training of residents. And so, we think we have a winning hand, and we’re going to continue to play that hand.

Mike Matson:

I want to ask one about the Q Guidance System in spine. It sounds like it’s doing well. I’m just wondering if you could maybe give us sort of an overview of it. I know you’ve had navigation systems time before. Is this something kind of different, or is it more just the latest version? And then how does it kind of fit in when you do bring Mako into spine?

Mike Matson:

Okay. Got it. And then just given the guidance, I assume this is early, kind of material issue, but I thought I’d ask about it anyway because we’ve heard about it from some other companies. But can you just comment on any Russia exposure you have and whether or not there’s the latest sanctions are having any sort of impact on your business?

Operator:

Our last question will come from Richard Newitter with Truist Securities.

Kevin Lobo:

Look, it’s a good question. I think I’ve talked about the adjacencies that we’re interested in. First and foremost, there’s a lot of tuck-in demand. Each of our businesses are building their wish lists and sort of evaluating different targets. And I think that’s job one is looking at those near-term targets that tuck-in. Those create tremendous financial returns for Stryker. They don’t always move the needle for the overall growth, but they’re really terrific financials for us to do. And when you feed our existing sales force of Stryker, we know how to sell, and we’re able to really do that very, very well. I would tell you, in the adjacency space, no change to the adjacencies that we’re interested in. I think I’ve mentioned them before. What I would tell you is neuromodulation’s one I’ve talked about in the past. And within neuromodulation, obviously, there’s a lot of different parts to that. There’s spinal cord stimulation, there’s deep brain stimulation, there’s peripheral nerve stimulation, and stimulation as you know in sleep apnea. And I do believe electrical treatment is going to be a big part of the future. Over time, we’ve been a little hot cold on spinal cord stimulation. I would tell you right now, we’re probably a little bit more cold on it, just kind of a challenging market and -- so that’s the way the only thing maybe I haven’t said in the past. But otherwise, every other adjacency that I talked about in Q1 are still very much on our radar screen. And as our cash frees up, probably more into next year. If the tuck-ins aren’t of a significant size and we have cash starting to build up and our debt position better, hopefully, we’ll be able to make a move in one of those adjacencies that I’ve talked about in the past.

Kevin Lobo:

Yes. I think the word stabilization, I’d probably prefer that than grind, but yes, it’s probably both, right? So Spine is a tough market, no question about it. But already with Q Guidance, we’re feeling good about that. We’ve bolstered our expandable portfolio a bit. We still have a couple of gaps that we’re looking at. Obviously, we would like to fill. But the enabling tech is really what gets us excited. And so I think the robotic platform will put us on a par at least with the competitors and then this other secret launch I talked about from coming out of instruments, which we’ve shown some surgeons kind of will put us ahead of the game on enabling technology. But yes, we have to wait. Unfortunately, it’s not ready yet. It’s coming. The instrument launch will probably come in before the Mako, and that will be able to be used with the Q Guidance. It will be compatible with Q. So that’s where -- you’ll hear about that probably earlier than you’ll hear about Mako. But yes, I wouldn’t assume we’re going to -- we’re going to try to kind of keep in line with market growth, which is kind of what we’re doing right now, hold our own until we get to that period of time, and then we could start to grow more like a typical business of Stryker.

Kevin Lobo:

Thank you all for joining our call. We look forward to sharing our Q3 results with you in early November.

Kevin Lobo:

Welcome to Stryker's first quarter earnings call. Joining me today are Glenn Boehnlein, Stryker's CFO; and Jason Beach, Vice President of Investor Relations. For today's call, I will provide opening comments followed by Jason with the trends we saw during the quarter and some product updates. Glenn will then provide additional details regarding our quarterly results, before opening the call to Q&A. In the first quarter, we delivered organic sales growth of 13.6% with double-digit growth in both MedSurg and Neurotechnology and Orthopaedics and Spine. Our international business continues to be a growth engine with strong results in all countries other than China, which had negative growth due to COVID and volume-based procurement. We are also seeing good traction with our pricing initiatives, delivering positive pricing overall in the first quarter. Importantly, we have begun to realize the gradual improvement of component availability and lessened supply chain constraints. We delivered quarterly adjusted EPS of $2.14, reflecting 8.6% growth compared to the first quarter of 2022 driven by our strong sales performance. With one quarter behind us, we now expect an increased full year organic sales growth of 8% to 9%, coming off a year with almost 10% organic sales growth. This continued sales momentum is a testament to our team's strong execution. We are increasing our expected adjusted earnings per share to $10.5 a share to $10.25 a share. I remain pleased with our ongoing commitment to talent and culture, which is reflected in the recognition of Stryker for the 13th year in a row as one of Fortune's 100 Best Companies to Work For. I would like to thank our leaders for maintaining our positive culture through the significant growth that we have experienced over this period of time. In addition, we recently published our third annual comprehensive report, which captures our commitment and disclosures on our three pillars of corporate responsibility, stronger people, healthier planet, and good business. In July, we will share our virtual corporate responsibility roundtable with leaders from across the organization, bringing to life our progress and how these three pillars tied to our mission. Finally, we will be holding an Investor Day on November 8th in Mahwah, New Jersey. We will provide more details about this event in the coming months. I will now turn the call over to Jason.

Glenn Boehnlein:

Thanks, Jason. Today, I will focus my comments on our first quarter financial results and the related drivers. Our detailed financial results have been provided in today's press release. Our organic sales growth was 13.6% in the quarter. The first quarter of 2023 had one more selling day than 2022, which is approximately a 1% benefit. The impact from pricing in the quarter was favorable by 0.7%. We continue to see a positive trend from our pricing initiatives, particularly in our US MedSurg businesses, all of which contributed positive pricing for the quarter. Foreign currency had a 2.2% unfavorable impact on sales. In the quarter, US organic sales growth was 12.6%. International organic sales growth was 16.6% impacted by positive sales momentum across most of our international markets. Our adjusted EPS of $2.14 in the quarter was up 8.6% from 2022, driven by higher sales and a favorable adjusted income tax rate, partially offset by inflationary pressures and the impact of foreign currency exchange, which was unfavorable $0.06. Now, I will provide some highlights around our quarterly segment performance. In the quarter, MedSurg and Neurotechnology had constant currency sales growth of 13.1%, with organic sales growth of 12.4%, which included 12.1% of US organic growth and 13.3% of international organic growth. Instruments had US organic sales growth of 8.9% led by double-digit growth in the Surgical Technology business. From a product perspective, sales growth was led by power tools, Steri-Shield, waste management, and smoke evacuation. Endoscopy had US organic sales growth of 16.2% driven by strong growth across most of its major businesses. The growth was highlighted by general surgery, sports medicine, sustainability, communications, and ProCare products. Medical had US organic sales growth of 13.2% reflecting solid performances across our acute care, emergency care, and Sage businesses and benefiting from improvement in product supply throughout the quarter. Our US Neurovascular business returned to growth with organic sales growth of 7.3%, reflecting a strong performance in our hemorrhagic business. The US Neurocranial business had organic sales growth of 9.1%, which included double-digit growth in our Sonopet iQ, Signature High Speed Drills, Bipolar Forceps and Max Space Neuro product lines. Internationally, MedSurg and Neurotechnology had organic sales growth of 13.3% reflecting double-digit growth in almost all businesses. Geographically, this included strong performances in Europe, Australia, Canada and Japan. Orthopedics and Spine had constant currency sales growth of 15.1% with organic sales growth of 15.2% which included organic growth of 13.3% in the US and 20.3% internationally. Our US Hip business grew 16.2% organically reflecting strong primary hip growth fueled by our Insignia Hip Stem and continued procedural growth. Our US Knee business grew 20.7% organically, which reflects our market-leading position in a robotic-assisted knee procedures. Our US Trauma and Extremities business grew 13.7% organically with strong performance across all three businesses. Our US Spine business grew 6.3% led by the performance in our enabling technology and Interventional Spine businesses, including the recently launched Q Guidance Navigation System. Our US Other Ortho declined organically by 14.8% primarily driven by the impact of deal mix changes, specifically more rentals related to Mako installations in the quarter. Internationally, Orthopaedics and Spine grew 20.3% organically, which reflects strong performances in Europe, Australia, Canada and emerging markets. Now, I will focus on operating highlights in the first quarter. Our adjusted gross margin of 63.2% was unfavorable approximately 90 basis points from the first quarter of 2022, reflecting the impact of increased manufacturing and supply chain costs driven by inflationary pressures, somewhat offset by price and volume increases. Sequentially and compared to Q4 2022, we have improved our adjusted gross margin by approximately 50 basis points driven by mix, price decreases in spot prices and improved manufacturing efficiencies. Adjusted R&D spending was 6.5% of sales, which represents a 70 basis point decrease from the first quarter of 2022 due primarily to higher comparable in 2022, which related to the ramping of costs for product launches. Our adjusted SG&A was 35.6% of sales, which was 50 basis points higher than the first quarter of 2022, primarily due to normalization of sales force expansion and meetings. In summary for the quarter, our adjusted operating margin was 21.1% of sales, which was approximately 70 basis points unfavorable to the first quarter of 2022. This performance is primarily driven by the aforementioned inflationary pressures primarily on gross margin. Adjusted other income and expense of $65 million for the quarter was slightly higher than 2022 mainly driven by a one-time benefit in 2022. The first quarter of 2023 had an effective tax rate of 12.8%, reflecting the impact of geographic mix and certain discrete tax items, including stock compensation. For 2023, we now expect full year effective tax rate to be in the range of 14% to 15%. Focusing on the balance sheet, we ended the first quarter with $1.8 billion of cash and marketable securities and total debt of $13.1 billion, approximately $100 million of term loan debt was paid down in the quarter. Turning to cash flow. Our year-to-date cash from operations is $445 million. This performance reflects the results of net earnings and higher accounts receivable collections in the first quarter. Considering our first quarter results, our strong order book for capital equipment and continued positive procedural trends, we now expect full year 2023 organic sales growth to be in the range of 8% to 9%, with pricing to be relatively neutral for the year. If foreign exchange rates hold near current levels, we anticipated 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. Based on our performance in the first quarter together with our strong sales momentum and further progressive easing of supply chain disruptions throughout the year, we now expect adjusted earnings per share in the range of $10.05 to $10.25. And now I will open up the call for Q&A.

Lawrence Biegelsen:

Good afternoon. Thanks for taking the question and congratulations on a really impressive start to the year here. Kevin, I guess, I would just love to start with the growth rates we saw in Q1 in some of your businesses like both in Ortho and MedSurge. What in your view is, was there anything here that was a one-time here and what do you see that sustainable?

Lawrence Biegelsen:

So let me just follow up maybe for Glenn. If I'm doing the math right here, you raised the guidance by about 70 basis points to 80 basis points at the midpoint. The Q2 to Q4 organic growth, Glenn, and please correct me if I'm wrong, it implies about 7% at the midpoint. Is that close and kind of how are you thinking about the why the deceleration I guess and how -- and any color on the quarterly cadence from here? Thanks for taking the questions.

Operator:

Thank you. Our next question comes from Robbie Marcus with JPMorgan.

Kevin Lobo:

Yeah, sure. Thanks, Robbie. I would tell you that the knee performance is just a continuation of what you've seen for the past three or four years where all the Mako growth, the cementless growth, continues to fuel market leading growth. So that's not a new story. Some of the numbers OUS were pretty breathtaking. But part of that was due to softer comparables and part of that's due to really picking up Mako installations OUS. It continue to be strong in the US, but OUS has a much longer runway and started much later as you know. And so Mako will fuel that OUS growth in the same way that it's fueled our US growth for many years. So that's the knee part. On Hip, it's really a combination of the Insignia stem as well as Mako. The 4.0 software was launched within two years, in the last two years, that combined with Insignia really positions us beautifully for direct anterior and we really like the momentum that we're seeing in hips and we expect that to continue. Trauma and extremities has been a -- just a great story. The Wright Medical deal has turned out spectacularly well. The upper extremities business is absolutely on fire, the market leading business and grew very strong double-digit growth. And as well foot and ankle is really starting to pick up steam and had a very strong performance. So really all three of those Trauma and Extremities businesses, including Core Trauma had strong performances and the outlook for those businesses continues to be very positive.

Kevin Lobo:

Yeah, so far, we're still seeing very strong orders for all of our capital equipment businesses, large capital, small capital. We still have healthy order books across the board. There is a bit of noise here now that you hear from some hospitals saying while they're starting to think about capital, but we're not seeing it in our order book at least not yet.

Joanne Wuensch:

Good evening and thank you for taking the question and quite a nice quarter and I'm going to agree with some of the growth rate in hips and knees, particularly in the US were quite strong. I just want to take out picture a few things. Can you give us an update on where you think you are in the ASC and I'll throw in my follow-up now on updated thoughts on use of cash? Thank you.

Jason Beach:

Cash flow?

Joanne Wuensch:

Well, use of call.

Operator:

Thank you. Our next question comes from Vijay Kumar with Evercore ISI.

Kevin Lobo:

Okay. Well, there's a lot of questions in there, Vijay. So let me start first by saying that there really isn't a new story, right? The knee business continues its strong performance. The hip business, as we said, once we get into the Insignia Stem launch, we're going to start to be able to grow above market when you combine it with Mako and with the right combine it with Stryker, we have just an incredibly strong position in Trauma and Extremities. We just executed extremely well. The market is better and we said that there was going to be a tailwind. There's no new news there. There is a tailwind. I don't think it's pull forward. I think you're going to see that tailwind last we said six quarters was our estimate. So this is the first of six quarters where you're seeing that tailwind. Keep in mind. The comps are part of the story, not just for Stryker, for the entire market. The comps were affected by COVID in the prior year. And so you're going to see an elevated market growth this quarter. But I do believe the tailwind will continue into second quarter, third quarter, again, a moderate tailwind, but our ability to take advantage of our product flow and of course our sales force execution is something that I don't see changing. I think we'll continue to be able to perform very well relative to the market and the market is going to be a little bit more elevated. And then the smart implant. So, no, we don't have any current plans for smart implant. We do have the motion sense that we've launched, which is a wearable that measures both on the femur and the tibia. And so we're an unlimited launch on that. And that is a way to make sure that you can monitor post-operatively all the types of measures that you would be thinking about after the procedure. So that's our approach versus having it implanted in the body.

Glenn Boehnlein:

Yeah. I mean, you know, first of all, we're pleased and we've made some incremental progress. And that's kind of why I wanted to call out sequentially as being maybe a little bit more important as you look at margin year-over-year. If you look at just sort of in just for the quarter, some of the big things are really price. We did see reduced spot buys. But keep in mind, we're still amortizing those 2022 spot buys. So that's going to hit us on into third quarter. We also as supply evened out, it just allowed our manufacturing to be a little more consistent and drive better efficiencies. And so we kind of got back on driving better manufacturing efficiencies. The other thing we're seeing is that freight rates are monitoring and we're seeing improvement in those rates. The other the couple pieces, I would say, mix was a bit of a tailwind. Obviously, if you think about Ortho and Spine and the kind of gross margins they drive versus MedSurge, that was a little bit of a tailwind. I think that will continue to be a little bit of a tailwind as the year progresses. We are still tempered in this environment, this inflationary environment, though. And so that will keep a tamper. We're early in the year, Vijay, and we're not thinking that we want to guide on gross margin yet. I think we see some daylight and we feel good about that. But it will be a work in progress as the whole year pushes forward.

Matthew O'Brien:

Great. Thanks for taking the questions. Maybe to follow up a little bit on Larry's question on guidance. I share his math. As I look at the numbers, I think, you beat by a couple hundred million on the top line and kind of carry that through for the full year. And I think, Kevin, at Academy, you said you thought there would be a little bit of headwind on pricing. That might have just been an Ortho comment. But also staffing is getting better. So staffing better pricing seems like it's getting better. I think given where the stock was trading, people are expecting you to guide a little bit higher if you did beat. So why not guide a little bit higher for the full year or incrementally higher than the beat given what we're seeing in your markets and the supercycle just about to start? Thank you.

Matthew O'Brien:

Okay. Makes sense. As a follow-up, Kevin. On Mako, I know more rentals. It just is because I look at the rest of the business on the capital side of things. You're not having any problem selling things. I know Mako is more expensive, but you've got [RAS] (ph) out there, you've got VELYS from J&J and now you're doing more rental contracts. So I guess the interpretation from most of the investors would be that, hey, they're seeing more pressure in terms of the ability to sell Mako. Is that fair or are we just not able to see that you're still capturing your fair share of Mako sales and placements within the marketplace? Thanks.

Jason Beach:

Yes. I think maybe just one additional comment relative to rentals. I think the thing to keep in mind is a large percentage of these rentals they'll flip to purchases, right? So it's not like they're going in and the units are coming back out. So, to Kevin's point, we feel really good about the Mako business.

Operator:

Thank you. Our next question comes from Ryan Zimmerman with BTIG.

Glenn Boehnlein:

Yes. It's a good question, Ryan. I think first of all, if you look at sort of the midpoint of both guides, sales and EPS, we actually are starting to show leverage. So I think that's a positive direction. We're still very early in the year. And we are going to be mindful that we're still in, as Kevin referred to, somewhat volatile circumstances relative to supply chain, some other macroeconomic factors. And so that causes us to make sure that we're being smart about where we land in the guide. To that point, as we see the quarters play out over this year, if we see improvement, I think, we'll definitely feel compelled to take the guide up.

Ryan Zimmerman:

Okay. And then, Kevin, I'd love to get your perspective on the state of the spine market right now. There's obviously a lot of disruption, as you know. But NUVA Globus is progressing forward. As of right now, both parties voted to consummate that deal. Is there any disruption that you're able to capitalize on that we're seeing in your US spine numbers right now as they are starting to show some nice growth?

Operator:

Our next question comes from Shagun Singh with RBC Capital Markets.

Kevin Lobo:

Yes, sure. So let me start by saying that this year, to Glenn's previous remarks, we are focused on paying down debt and getting the term loan off the books. We are continuing to pursue what we call tuck-ins. And Cerus Endovascular is one of those tuck-ins, which we will close shortly. We have other tuck-ins that are in the works right now, and we'll see which ones of those happen this year. But this year is more of a year of tuck-in than it is doing billion type of deals. But as we get into next year, if we continue with the strong cash flow performance that we're currently experiencing, we will be back in the market for those larger size deals. The teams haven't slowed down their work. They're continuing to pursue discussions with many of our targets. Valuations are getting better, which is good. Interest rates are going up, which is bad. But on the overall basis, we think the market is still primed with many, many good targets. And we continue to believe that using our available cash for acquisitions as the first source of cash and the first use of our cash is the right strategy with Stryker is a key part of our growth formula. Specific to your question on women's health and urology, we do have a presence in urology with our Endoscopy division, and that is an interesting space that we'd like to build around over time. We do have some women's health presence also, a combination of part of the Instruments division as well as our Endoscopy division is present right now within breast care. So these are not markets where we're sort of absent, but we're already present to some degree. And if we could get a larger presence, that would be something that is one of many, as you mentioned, many adjacencies that we're looking at. And I think that's all I'll say for this earnings call.

Operator:

Thank you. Our next question comes from Josh Jennings with TD Cowen.

Kevin Lobo:

Yes. Listen, we're not going to get into all the details of the launch or specific milestones. Suffice to say that we are still very much on track with the time lines that we laid out last quarter. No change and continued really positive feedback from customers that we are exposing to the technology. We feel the regulatory path has gotten more certain, which is why we never provided dates prior because we weren't as confident on the regulatory path. These are complex launches. If something changes, we'll let you know. But right now, everything remains on track as per the last discussion we had.

Operator:

Thank you. Our next question comes from Matt Miksic with Barclays.

Kevin Lobo:

Yes, sure. Thank you. Yes, we have a very significant lead in robotics. We have a significant lead in cementless, and we have a significant lead in the ASC. So we have all three of those factors are at play and contributing to strong performance. And you are right, in the ASC, they tend to shift much more towards rentals or let's call it, forms of financing that -- because there's always physician ownership as part of these deals, and they don't have the capital budget that hospitals do to make a purchase, so they do prefer financing. And so you'll continue to see that with ASCs much more of a shift towards rentals. And we're seeing with ASC's strong demand for Mako, which is really exciting for us. And so if there's a there OR orthopedic ASC, usually, at least one of those will have a Mako in them. And that our offense plays very well for that given all the other technology we can provide for the ASC. So those -- I would say all three of those factors are really at play having significant leads across those three tenants.

Kevin Lobo:

Yes. So back -- if you think about medical, medical is going to have another very strong year this year. Even though you saw a boomer in the fourth quarter, I did signal that medical will still have another strong year. They have the largest backlog of all the divisions of our company right now and that's across emergency care as well as acute care. The largest is within medical. And so we're still fighting the supply chain is getting better every month, but it's still not easy. Out there in the supply chain for medical, and then the other capital businesses follow behind medical. So still a very, very strong order book. And what was the second? And on Vocera, yes, we're really pleased. We predicted this, right? If you go back to second quarter of last year, we said -- we're going through some disruption or making changes to the way that we go to market and in the commercial model. We're pushing much more towards the cloud. So very intentional decisions and things have played out basically as we thought. Their orders are also -- have also picked up pretty meaningfully. And we do expect to see an acceleration starting in Q2 based on the orders we already have in the system. We know that, that's going to start to be a nice contributor. And then given how much we pay for Vocera, we will provide some more metrics on that at the end of the year, and we plan to probably do that on an annual basis as we do with Mako.

Travis Steed:

Hi. Thanks for taking the questions. I guess and congrats on another quarter as well. I wanted to break down Q1 a bit more. A lot of companies have mentioned January was really the strong month where there was a comp benefit. So curious how you saw February and March shape up and even April. And I heard you say procedures were ramping over the quarter. So that implies April even kind of better in February and March. Just any kind of color you can give on the shape of the quarter and how things are trending across the different businesses would be helpful?

Travis Steed:

Great. Thank you. And then -- and Glenn, maybe touch a bit more on the margins. If you can help quantify some of the supply chain purchasing improvements we've seen so far [Technical Difficulty] but just come from the higher costs rolling off. And then maybe longer term, the path back to the -- is there a path back to the 2019 gross and operating margins?

Operator:

Thank you. Our next question comes from Steve Lichtman with Oppenheimer & Company.

Kevin Lobo:

Yes. I think if you go back to 2019 and call that the last normal year that we've had. I would say we are fully backed to 2019 and actually growing from that. So you're right, it's very difficult to look at comps. You've got -- just look at last year, you have to look at how it was last year versus the year before. So it has been very tricky, to your point. But I think we're now in a kind of post-pandemic world. Even though we do have staffing shortages here and there, the surgeons are as busy as they've ever been. If they had sometimes some more stuff, I think you do even more. But I would say we're in a very good position in the market. There's healthy demand. Hospitals are learning how to get more procedures done. And so I would say we're fully back to the 2019 in most parts of the world. Maybe China is a little different. Outside of China, everything else is kind of fully back and building kind of what I'll call a normal growth rate off of being fully back. And of course there is pent-up demand.

Glenn Boehnlein:

Sure. I mean, first off, we're super excited that these pricing programs that we put in place last year are really starting to take hold and we're seeing an impact. MSNT continues to perform fairly positive. I would expect that they'll continue to perform at a positive or near positive level throughout the full year. Ortho is a little bit more complex. It's heavily driven by contracts. The impact of pricing can vary depending on the anniversary of those contracts. So really going after Ortho and just trying to manage that to be a little less negative. And then as you look at that price that we put out, it's impacted by mix. These product introductions are going to impact that. And I would say that all of these factors kind of go into where our forecast was that, yes, Q1 was great. But as we anniversary these pricing programs, as we see new products come out, we're going to see a little moderation of the impact of that price and that's where we're holding right now as the year progresses.

Rick Wise:

Good afternoon. Hi, Kevin. Hi, Glenn, I want to ask for a little more color, if we could, on SG&A. I know you're reluctant to get into forecasting or talking in too much detail about specific lines. But the SG&A was a lot higher than I expected this quarter. Yes, volumes were higher, so was it higher commissions? And as I look at last year, and I know there's a million moving pieces here, but you started out $1.5 billion in SG&A. And it was roughly approximately that in each quarter. So is this start to the year giving us some sense of how to think about SG&A in the second, third, fourth quarters as well? Thank you.

Rick Wise:

Great. And one other question to touch on sort of a side topic a little bit. But smoke evacuation, I know you've talked about a lot in the past, Kevin, and we've seen three states. I think if I'm remembering correctly, Oregon, New York, New Jersey, smoke bills going into effect this year, 10 additional states in the pipeline. I know it's not all driven by state legislation, but nurse associations, et cetera, continue to want to move in this direction. Any update there? Are you still excited about this? Is this still going to be an above-average growth area for Stryker? Thanks so much.

Rick Wise:

Great. Thank you.

Matthew Mishan:

Good afternoon. Thank you for taking the questions. Not to harp on like the one outlier, but I guess on neurovascular. Could you comment on like on some of the weakness there? And how you expect that to progress through kind of 2023?

Kevin Lobo:

Yeah. For NV, China was a pretty significant business. For overall Stryker not so much, but it was for NV. And so that negative you're seeing is really entirely driven by China in the international Neurovascular business.

Jason Beach:

Yes. I'll take this one. As you can imagine, when you think about deal mix and some of the things that go into that line, it will continue to move around as we go throughout this year. And as you start to get into next year, certainly, you would expect to see that line turn to positive. But it is going to be driven by deal mix as we go throughout this year.

Operator:

Thank you. Our next question comes from Imron Zafar with Deutsche Bank.

Kevin Lobo:

Yes. Thanks for the question. I wouldn't think so much about expansion of TAM, I would think much more about share gain. Because we're still basically in procedures that are using visualization. We're not creating new visualization for new procedures. But the reason I think it plays well for share gain is we have much better solutions for both sports medicine as well as neuro procedures. We were always fabulous with abdominal surgery, general surgery, but not quite as strong in those two specialties. And then being able to light up new fluoro force, new imaging agents to be able to detect cancer, that's game changing, right? We will be first to the market in being able to identify new forms of cancer. We will share that when those launches occur. We'll actually share that with you. But that will be a tremendous catalyst to drive share gain when you can identify critical parts of the anatomy much more precisely than the human eye can. And so we're very bullish on the long-term future for 1788.

Operator:

Thank you. Our next question comes from Richard Newitter with Truist Securities.

Kevin Lobo:

Yes. Being on the ground floor for ASCs is helpful for all of our capital equipment. And the fact that we can provide a lot of what they need really helps -- it puts us in a good position, because we're on the ground floor. And Mako speaks for itself. It's brand. It's very strong in the market. [The turns] [4:24]*13 are very well aware of Mako and they're asking for it. But I think it gives us an advantage, frankly, not just for Mako, but for all of our capital equipment businesses. Being so involved we're in the conversation, making it easy for the ASC to be able to not only design the ASCs, but actually be able to speed up the construction of the ASC if they partner with one company that can provide a lot of what they need.

Kevin Lobo:

Yes. Certainly, for the ASCs, within orthopedic ASCs, they are buying really across product lines. They're still within the service line, but yes, they are buying capital. They're buying disposables, they're buying implants. And versus hospitals, that tend to stick at the product category level. This has been a shift with ASC for sure. But they're not buying across into a new service line like orthopedics or general surgery, because these ASCs are either orthopedic ASCs or they are GI ASCs or general surgery ASCs. So they are quite specific. But within Orthopedics and the Orthopedic ASC, they are absolutely buying across product categories and that definitely plays to our advantage because we're very deep within these service line, service line of orthopedics and obviously, neuro.

Danielle Antalffy:

Hey, everyone. Good afternoon. Thanks for taking the question and congrats on a really strong start to the year. Just one quick question for me and sorry to harp on this, it has come up a few times on the call. But -- just as we look at the margins, not a lot of margin upside in the quarter. I appreciate you still have inflationary pressures and inventory rolling off the balance sheet that's impacting that. But wondering if you could talk a little bit more about anything specific that happened in the quarter given such a strong sales beat and you're talking positive pricing commentary. So just sort of reconciling in line margins given the extent of the sales beat. Thanks so much.

Danielle Antalffy:

Thank you.

Jeffrey Johnson:

Yes. Thanks. Good afternoon, guys. Two quick Mako questions here. Just, Glenn, first, what are the margin implications on kind of this leasing, this pickup in leasing on Mako? Is there anything good or bad that, that does the margin line? And when these contracts convert over to a sale, let's say, in six or 12 months, any margin implications then?

Jeffrey Johnson:

All right. Fair enough. And then discussion here on competition and if competitors are going to offer no cost rentals or whatever no upfront, but then you guys as well, when you're happy with that as well. I guess the other thing I keep hearing out in the field, and we just want to cross check this with you. I mean the hospitals are kind of allocating more capital towards procedural tools, things that take care of the patients that are coming back in the hospital, less towards nonrevenue generating CapEx. I would assume that's another kind of thing that's impacting Mako at this point, too, right? I mean the hospital can put more towards your power tools in your Endo camera and get the rental upfront, it's a good allocation for them to go that direction and get kind of the best of both worlds. So I assume it's not just competition. There's a little bit here of just hospitals reallocating the procedural tools right now in the current cycle we're in.

Jeffrey Johnson:

Thank you.

Jayson Bedford:

Good afternoon. Thanks for taking the question. I realize we're getting a little late here. But I wanted to get back to the Ortho strength, but maybe come at it from an international angle. The growth in the quarter was quite strong, admittedly off a lower base. But are there similar factors relative to the US driving the growth, meaning a better staffing environment, backlog capture? Or is there another kind of more dominant factor driving the international Ortho growth?

Jayson Bedford:

Okay. That's helpful. And maybe just a quick one for Glenn. You kind of touched on this earlier, but pricing, it was what, 70 basis point good guy in 1Q, the annual guidance calls for a relatively neutral pricing for the year. Is it primarily a mix dynamic, acting as the biggest potential weight on price over the next few quarters? I'm just kind of wondering what would pressure price over the next three quarters?

Operator:

Thank you. Our last question comes from Kyle Rose with Canaccord.

Kevin Lobo:

Yes. So sure, most of our demand comes from replacement, certainly on small capital by far. On large capital, there's -- it does tilt quite a bit more towards construction. There are still a lot of construction activities that are still underway. Some of them got delayed because they just couldn't get supplies, because they had staffing challenges. So there was a bit of push in some cases. But we have a really healthy order book, whether it's Mako, whether it's Beds, whether it's our booms and lights, pretty healthy order book. And those businesses have been performing very well. So -- and those tend to be kind of a six month, we have a forward look for about six months. And so right now, we're seeing pretty healthy demand across all of our small capital as well as large capital businesses. And we'll see how that plays out in the future. But at least we have pretty good visibility, at least for the next six months, that things are good, and we're going to expect continued strong performance in all of our capital business.

Kevin Lobo:

So thank you all for joining our call. As you can see, we had a very strong first quarter. We've raised our guidance and we look forward to showing our Q2 results with you in August. Thank you.

Kevin Lobo:

Welcome to Stryker’s fourth quarter earnings call. Joining me today are Glenn Boehnlein, Stryker’s CFO; and Jason Beach, Vice President of Investor Relations. For today’s call, I will provide opening comments, followed by Jason with the trends we saw during the quarter, Mako performance insights and updates on Vocera and Wright Medical. Glenn 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 remain focused on the future, as we progress 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 U.S. 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 that 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 we 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 med tech, 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 macro emit environment, our pricing and cost actions will translate to an adjusted EPS of $9.85 per share to $10.15 per share. I will now turn the call over to Jason.

Glenn Boehnlein:

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 $0.16. 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 $0.31. Now I will provide some highlights around our quarterly segment performance. In the quarter, MedSurg 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, Steri-Shield, 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 ProCare. 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, silver glide bipolar forceps and Max space Neuro product lines. Internationally, MedSurg 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 THA 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, Orthopaedics 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-point 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 we 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 zero percent 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 per diluted share to be in the range of $9.85 to $10.15, 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.

Robbie Marcus:

Great. Thanks for taking the questions and congrats on a really nice quarter. I wanted to start out on the MedSurg side of the business, where you had really, really strong performance in the fourth quarter. You talked about a healthy order book, but I was hoping you could give a little more visibility into exactly what you saw, was there a bolus of demand there, was this all underlying or catch-up demand and then you talked about a healthy order book, but just what you are seeing in terms of your hospital clients around the world and their desire to continue to buy capital here?

Robbie Marcus:

Great. And maybe a follow-up for Glenn, you talked about second half, probably, better than first half. I have been on this call a bit before this call and you talked about first quarter EPS not being much better year-over-year. Any other color you could give us both on the topline as we think about 2023, just given there are some highly variable growth rates on the topline, as well as margin things to think about down the P&L? Thanks.

Robbie Marcus:

Really helpful. Congrats again. Thanks.

Operator:

Thank you. The next question comes from the line of Matthew O'Brien with Piper Sandler. You may proceed.

Kevin Lobo:

Yeah. Rather than thinking about what percentage of the growth is, is just how durable is it? Five years in a row now, organic sales growth has exceeded the U.S. organic sales growth, and of course, China has really didn’t contribute anything in 2022. So Europe was double-digit grower. It’s a growth engine for Stryker. I have talked about Europe for the last six years or seven years and we are hitting our stride in Europe. But even other emerging markets, whether it’s Latin America, whether it’s the Middle East, Eastern Europe, parts of East Asia, we have really started to hit our stride. It feels exciting. We have great leadership teams. We are getting great penetration now with Mako and fluorescence imaging, some of those power brands are now really starting to show up effectively. So the way I’d like to think about it is that emerging markets should grow roughly double the growth rate of Stryker’s growth rate, and overall, we should continue to grow above the Stryker growth rate in these international markets. And as over time, if we don’t continue to have large acquisitions in the U.S. then that will become a bigger and bigger percentage of our business. But being acquisitive it’s still pretty small, if you think about 72% roughly of our sales are in the United States. But it’s starting to have a material impact and you saw really an outstanding quarter in Q4.

Operator:

Thank you. Our next question comes from Vijay Kumar with Evercore. You may proceed.

Kevin Lobo:

Yeah. Look, I think, the outsized growth is in the Medical division, right? So Medical division isn’t going to typically grow 26% organic, right? That’s outsized and that’s really, let’s call it, making up for supply. So they had huge orders and we were able to get healthy in some of the product lines and we were able to get a lot of shipments out the door. That kind of variability could happen from quarter-to-quarter. But if you look at a full year kind of organic growth rate, Instruments 10%, Endoscopy 15%, Medical 11%, kind of on a rolling four-quarter basis. Those are really outstanding results. So it’s not a one quarter wonder. I would kind of look at the overall year having organic growth of 9.7%. That’s the highest I have had in my tenure. And we have new products, I would say, they are as good a set of pipeline as I have had since I have been in this role. So that bodes well for next year. We are starting with the highest organic growth guide that we have ever started with and assuming launches go well and everything, this should be another very, very strong year. I think you will see a little bit of volatility quarter-to-quarter primarily with Medical, because they do have the largest backlog of all the divisions in the company and a more consistent performance with the implants side of the house.

Glenn Boehnlein:

Hi, Vijay. I will take some of these. If I miss a part, you can correct me. First of all, the growth is not front-end loaded. It’s pretty steady throughout each of the quarters and you will see that there is going to be solid growth just given sort of the momentum that we are feeling from fourth quarter. In terms of the order book, we exited 2022 with an increase in the order book year-over-year. So we are actually feeling very bullish about capital sales, about our customer’s willingness to buy capital. So we don’t -- we feel like that’s a great tailwind for the whole year and did I miss the third part?

Glenn Boehnlein:

Yeah. Okay.

Glenn Boehnlein:

Yeah. As I mentioned, we assume that we will see gradual improvement in the supply chain. We saw some of that in Q4. We actually feel pretty good about our access to supply, we are seeing a reduced volume of spot buys, which are those really high cost items and we are also beginning to work with our original set of vendors and also going up the food chain and actually working with chip suppliers so that we feel like we have a good handle on what’s going to happen with supply chain, but it should become better quarter-to-quarter-to-quarter with good improvement and visible improvement in the back half of the year.

Kevin Lobo:

Thank you.

Shagun Singh:

Great. Thank you so much for taking the question. I was just wondering what you have assumed for margin expansion in 2023 relative to your at least 30 basis points of outlook that you previously shared. And then I was wondering if you could talk a little bit about the VCON [ph] business in hips and knees. In knees, your major competitor does have a new cementless launch. Do you see that as a price mix benefit for them or something that could drive competitive account conversion, and then on hips, it came out stronger than what we were expecting. I was just wondering if you could talk a little bit about the drivers and if we could see meaningful share gains on the hip side, similar to what we have seen in knees? Thank you for taking the questions.

Kevin Lobo:

Yeah. And related to joints, obviously, we are delighted with the year that we have had in both hips and knees. Having global double-digit growth in both hips and knees is terrific. The hip strength clearly driven by the launch of the Insignia Hip Stem, and as a reminder, we are only about a little less than halfway through that launch. So we still have a lot of sets to get out. It will take us all of this year and maybe into a little bit of the first quarter of 2024 to be fully launched with Insignia. So we are still kind of in the gaining momentum mode with Insignia and that’s coupled with the 4.1 Mako hip software. So we can -- we expect hips to continue to be very strong. As it relates to knees, clearly, that’s been an outperformer for us for the past six years, seven years since we launched the Mako Total Knee application. And with cementless, where we continue to gain, I am not at all worried about competitive entrants on cementless. People aren’t going to move away from our cementless for a competitive product when we have tremendous proven, Jason mentioned, 1 million procedures already done and competitors just starting to launch theirs. They are going to be awfully very cautious before they move to another product on something like that and that synergy with cementless and Mako is really significant. Last thing I’d say is, we are launching new software, just like we did with hip with the 4.1, we call it, TKA 2.0 Mako software. We have just -- we are in the middle of a limited launch. It’s going exceptionally well. We expect the full launch sometime by around Q3 of that new software upgrade, which creates better user experience, better for training residents and teaching hospitals, so very, very good feedback on that. So we do expect to continue to outperform in both knees and hips again in 2023.

Operator:

Thank you. Our next question comes from Ryan Zimmerman with BTIG. You may proceed.

Kevin Lobo:

Yeah. No. Certainly, on the Neurovascular comps, I -- we did have pretty good performance a year ago in Neurovascular. I think that the challenge is kind of looking at versus the prior year Neurovascular and then going back versus 2019. So, but certainly, we have had our challenges with Neurovascular in the U.S. We have had continued good growth outside the United States and I think I have mentioned on prior calls that the ischemic market segment has certainly gotten softer. There are a lot more competitors that are kind of distracting and taking up time. We still think it’s a great market. There’s still a lot of patients that are -- that have not been treated. We are only treating a small percentage of people that have these large vessel occlusions in the brain. So we do think it’s a good long-term market. We are launching a new coil called Tetra Coil here in the United States, which is exciting. And we will continue to invest. We have a deal that’s pending. Obviously, regulatory clearances before it closes on a one and done for the hemorrhagic segment. We are very excited about that. acquisition. That will give us another shot in the arm. So, yes, we have had our challenges in the U.S. this year. We continue to grow very well outside the United States. It’s still a market we are very committed to. That’s kind of on the Neurovascular side. On the Spine side, look, the launch of Mako Spine is going to be critical. The Q Guidance launch is going very well and that was important for us. We had a gap, obviously, with enabling technologies, which is really important in the Spine segment. So I do believe this is, 2023 will be a year where we will continue to grow kind of around the market growth rate and then really get ready for the Mako launch to be able to start to grow above market. So, yes, they are not as glowing, the divisions, right now as some of our other divisions. But they are certainly competing well in the marketplace, growing roughly in line with the market, maybe a little bit below, but still highly profitable, highly important businesses to the long-term future of Stryker.

Kevin Lobo:

Yeah. As a company, we tend to be pretty conservative on getting time lines and robots are hard, right? Ask any of the companies who are trying to launch robots, whether they are in heart tissue robotics or soft robotics. Robots are difficult. What gives us confidence is our prototypes are built. We have tested it with surgeons. We have gotten feedback. We have had some meetings in one case with the agency to get an idea on the regulatory pathway. So we have enough in the pipeline right now. There’s always a little bit of uncertainty around approvals and full launch. And notice the term I used was initial launch, right? So we do expect to get approved and to start doing cases. But then as you do those initial cases, you might have to refine some of the training and things, so it might be a little bit slow out of the gate, we will see. The beauty of our approach is it’s the same robot that’s being used for hips and knees that’s going to be used and we have, as you know, thousands of them now out there. So that is exciting that we will be able to just do a software upgrade and have a different attachment and be able to use the same robot and I think a lot of hospitals will be excited about that if the robots not being used on one day of the week and they can have that being used for spine initially and then as the demand increases, then they can have a dedicated robot for spine. So we really believe that will be different than when we started where each robot had to sort of justify it on its own. Having one sort of robot with all these different applications will be powerful over time. But we feel confident just based on we spent a lot of money, and we spent a lot of time on this. The shoulder one took a little longer. As you recall, we were -- we thought that was initially going to be before spine, but we decided to move away from our implants to the Tornier implants and to use the BLUEPRINT planning software. So that caused a slight delay. But the teams are really working well and we are -- the feedback we are getting from surgeons that are seeing it is extremely positive.

Kevin Lobo:

Yeah. We are too.

Vik Chopra:

Hi. Thanks for taking the question. This is Vik on for Larry Biegelsen. Kevin, you talked about a super cycle of new products. Just remind us sort of what they are and how we should think about their impact in 2023. And my second question is, maybe just a comment on your trend in China, sort of what are you seeing there and maybe just the impact on Neurovascular, any color you could provide would be helpful? Thank you.

Jason Beach:

Yeah. Vic, as it relates to China, as you all know, right, China, as it relates to total Stryker less than 2% of our sales. So even as you consider some of the lockdowns and things in 2022, immaterial to our results in terms of Q4. Then as you think about 2023, early days as it relates to Neurovascular VBP. We are certainly keeping an eye on that and as we think about Q1 and the full year of 2023, when we get to the next earnings call, if there’s anything material to disclose, we will certainly do it at that time.

Matt Miksic:

Yeah. I just wanted to maybe get a sense and I know we could spend a lot of time talking about the many things that are going well and could go really well this year. But just a follow-up on Spine, the investment in the robot is significant, the portability of that hardware and upgrading the app, as you described, Kevin, is great. Between now and then, whether it’s Q Guidance or whether it’s implant launches or system launches or investments that you are making, can you talk about maybe anything that you would see as kind of gradually driving up momentum in that business as you head into -- as you get into that introduction of the robot next year?

Matt Miksic:

That’s excellent. Thanks so much.

Glenn Boehnlein:

Thanks, Matt.

Pito Chickering:

Hey. Thanks for taking my question. Can you guys hear me?

Glenn Boehnlein:

We can.

Pito Chickering:

All right. Great. So pre-COVID, the first quarter is about 23% of the annualized EPS. So with the commentary on no EPS growth for first quarter 2023, it looks like you guided about 20% of annual EPS. I understand the hard inflationary comps in 1Q, but why should 1Q be underweight the annual EPS number versus recovered years or should we take this as just back half margin expansion for 2023?

Pito Chickering:

Okay. And then just a quick one here on capital outlook, your commentary is very bullish. Can you just quantify us what the new orders in fourth quarter of 2022 were and how it compared to the fourth quarter 2021? Thanks so much.

Glenn Boehnlein:

Yeah. And that’s not a new commentary. So the last four months, I think, our commentary has been very consistent on capital. Our hospitals having challenges with their P&L and in some cases, sure, it’s not yet -- we are not seeing it in orders. We are not seeing any cancellation of orders. Are some projects being delayed here and there? Sure. But it really is not having any kind of material impact on our outlook for capital. Again, a lot of our capital is revenue-producing type of capital. So you wouldn’t expect any kind of slowdown. But even the large capital area, if I look at our communications business within Endoscopy, had a fantastic year, helped drive some of the Endoscopy growth and they have a terrific order book going into next year and that’s large capital that sometimes in prior recessionary cycles have been deferred. So we just aren’t seeing it yet. So that gives us optimism to kind of lean in on the growth for at least for 2023.

Operator:

The next question comes from Steven Lichtman with Oppenheimer. Your line is open.

Kevin Lobo:

Yeah. Look, there are flashpoints where you do see staffing as a challenge, but the hospital systems are getting better at dealing with it. And we saw through from September through to the end of the year, kind of a nice building of procedure and a steady kind of high volume. The demand is clearly there. There’s no question that there’s some pent-up demand and surgeons are booked out for a good three months, four months in general. And so we are seeing, I would call it, a nice, steady kind of improving trend and I think we will see a moderate tailwind throughout the rest of this year. These flashpoints tend to be very short and even in some of the -- if you look in Europe and some of the areas that had strikes and real causes for worry, they have kind of come and gone pretty quickly. And so we are feeling good about the outlook on a procedure standpoint and expect this to be a tailwind throughout the year.

Glenn Boehnlein:

Yeah. I think as you think about inflation, obviously, we felt the impact of the inflation numbers in the -- that were in Q3, especially that were very large. A moderation of that, I would say, occurred in Q4. But keep in mind, to the extent that we purchased raw materials or made inventory, those inflated raw material prices, that’s capitalized in our inventory. The other place that we will feel inflation and that it carries over to in this year is really going to be labor costs that went up that are baked in now solidly for the year. We are still experiencing a pretty high inflation in our freight and transportation costs. Energy costs, especially in Europe, now have inflation baked into them, we will feel it there. I think what we are thinking, though, is we are not -- as we look at 2023, that we are not thinking that inflation will continue to be at the levels that it was showing in 2022. So we are feeling that, that will moderate and that’s what’s included in our guidance.

Kevin Lobo:

Thank you.

Operator:

Thank you. Our next question comes from Drew Ranieri with Morgan Stanley. You may proceed.

Kevin Lobo:

Yeah. So, clearly, this trend towards procedures being shifted to the ASC is continuing. It really accelerated during the pandemic, but there’s no signs of that slowing down. Even if I look at our Mako installations, I would say, this year, it’s a record number in the ASC setting. So as procedures move to the ASC, they certainly want to use great technology and I don’t think that’s going to slow down. We are going to -- every hospital system you talk to has construction plans around ASCs and so I think that’s just an undeniable future trend. Obviously, that takes -- it will take time to build out more and more capacity, but we saw that increase in Q4 versus Q3, which increased versus Q2. So it’s just a steady gradual trend and I am talking mostly about hip and knee replacements, but we are also seeing even some spine procedures being done in the surgery centers to shoulders. And I just don’t think there’s any slowdown, it’s just going to continue over the next few years.

Glenn Boehnlein:

Yeah. I think as you think about the biggest contributor to cash flow, honestly, it’s earnings. So as we see progressive improvement in earnings throughout the year, I think, we will see that carry over into cash flow. There are some things that were maybe one-offs that we felt that we hope will get better in 2023. That bolus of AR that we had at the end of the year in 2022, obviously, we will collect that and kind of get back to a regular cadence of DSO. And then, finally, as inventory costs moderate and we feel more confident about supply, we will draw down on some of the safety stocks that we had pre-buy. We will also see just lower cost of inventory in raw materials and that should carry over to cash flow, too. And then the other area that I would highlight that maybe doesn’t get a lot of attention is, we continue to work on our AP and AP days, and we have made incredible improvements over the past two years to three years in terms of working with vendors and pushing AP out to beyond 70 days and we will continue to work on that as well. So I think all of that bodes well for cash flow improvement. But generally, I think, what you will see is as you see progressive improvement in earnings. You will also see cash flow fall out.

Michael Matson:

Yeah. Thanks for fitting me in. I guess I want to ask one on M&A. So I think you called out that you would be looking to do some more tuck-ins. What are you seeing out there with regard to the valuation expectations from potential targets? It seems like there was -- in the past year, there’s been sort of a disconnect between what the buyers are willing to pay and what the sellers want. I mean is that starting to get more realistic now and just maybe you can just comment generally what you are seeing there in terms of deal flow?

Michael Matson:

Thank you.

Joanne Wuensch:

There is a moment when you were rattling off, rattling maybe the wrong word, all the different growth in MedSurg and Neurotechnoology. And I could not get my head around some of these numbers and I am just sort of curious and maybe this has been addressed. How did this happen? Was this some level of pent-up demand in the capital equipment cycle, was it just the end of the year people have money in their budgets may want let go. Help me understand what this is and do you expect there to be more of a depleted effort in the beginning of this year?

Joanne Wuensch:

If I may, you do discuss new product cycle a couple of times. You have got a new power tool. You have got a new Neptune. What else would you like to highlight?

Joanne Wuensch:

It is. Thank you so much.

Operator:

Thank you. Our next question comes from Eric Anderson with Cowen. Please proceed.

Kevin Lobo:

Yes. We can.

Eric Anderson:

Excellent. Maybe thinking about cementless knees. I think about half of your knees are now going in cementless, correct me if I am wrong there. Where do you think that rate could be exiting 2023 and then maybe thinking longer term, what portion of your needs do you think will ultimately be cementless?

Eric Anderson:

Understood. Thanks for that. And apologies if I missed it, but are there any selling day impacts in 2023 that we need to consider?

Eric Anderson:

Okay. Understood. Thank you.

Operator:

Thank you. And our final question comes from Eric Fleming with Raymond James. You may proceed.

Glenn Boehnlein:

Yeah. The -- obviously, the segment that has the biggest impact is really our MedSurg businesses. We saw Q4 pretty much all positive pricing impacts across MedSurg and so we expect that to continue into 2023. I mean that being said, on the Ortho side, there’s a lot of work around contracts and structures and rebates, and so we are seeing good momentum there as well on pricing. I think the other thing to keep in mind is that, pricing is legacy product over legacy product and so to the extent that we have these product launches, like Kevin was talking about, we generally will launch with premium pricing over the legacy product, but it won’t be included in that pricing statistic. It really gets included in volume. So net-net, I think, you will see probably more favorable pricing coming out of the MedSurg businesses, but we are making great progress on the Ortho side, too.

Kevin Lobo:

Okay. Great. So, first of all, I want to thank all of you for your patience working through our technical challenges. As you can see, we had a terrific finish to last year, a really good start this year and had a chance to be out with our sales teams across Stryker and I could tell you the momentum is palpable. It feels like it’s going to be a strong year. We, obviously, have -- are going to continue to have some challenges around spotting this in the supply chain, but it certainly feels like the worst is behind us as we experienced last year. So I want to thank you all for joining our call. We look forward to sharing our first quarter results with you in April. Thank you.

Kevin Lobo:

Welcome to Stryker's third quarter earnings call. Joining me today are Glenn Boehnlein, Stryker's CFO; and Jason Beach, Vice President of Investor Relations. For today's call, I'll provide opening comments, followed by Jason with the trends we saw during the quarter and updates on Vocera and capital equipment. Glenn will then provide additional details regarding our quarterly results before opening the call to Q&A. For the quarter, organic sales growth was 10% with double-digit growth from our MedSurg and Neurotechnology businesses led by Endoscopy, Medical and Neurocranial. Our Hip and Knee businesses also delivered double-digit growth, reflecting the continued recovery of elective procedures and our worldwide Mako momentum. Lastly, we continued our strong international performance with double-digit organic growth led by Europe, Canada and emerging markets despite negative growth in China. For the quarter, we delivered adjusted EPS of $2.12 a share driven by our strong sales performance, partially offsetting negative foreign currency and inflationary pressures. We expect these pressures to continue but at a more moderate level for the remainder of 2022. We are pleased with our strong sales growth, which would have been even higher if not for material shortages, mostly affecting Medical and Instruments. Meanwhile, we are taking actions to deal with the cost headwinds, including inflationary challenges. First, as noted in Q2, given the higher input costs, we took a series of pricing actions across our portfolio. We have begun to see the impact of these initiatives, lessening the negative price impact on our business in Q3, but it will take time to see the full effect given the timing of contract renewals and rebates from pirate contracts expiring. Second, we have taken additional actions around cost, including the reduction of discretionary items, hiring actions and are proceeding with target restructuring plans in parts of our business. We continue to invest in R&D, demonstrating our continued focus on new product pipelines. This includes investments in R&D for enabling technologies, robotics, imaging and navigation, including our recently launched Q Guidance navigation system in Spine. Notably, we are making good progress with the development of our spine and shoulder applications for Mako. We have stopped the Cardan spine robotic project to focus all our energies on Mako and expect that the Mako spine and shoulder launches will occur in a similar time frame. Also during the quarter, we signed an agreement to purchase Cerus Endovascular, a technology leader in the hemorrhagic segment. This deal is pending customary closing conditions. We remain confident in the outlook of our business and expect to continue to deliver sales growth at the high end of med tech, which is reflected in our narrowing of full year organic sales growth to the higher end of our prior range, now 8.5% to 9%. However, worsening foreign currency and continued inflationary pressures have caused us to lower our full year adjusted EPS range to $9.15 to $9.25 per share. Overall, our team has shown good resiliency, and I'm pleased that employee engagement remains very high. We continue to be recognized across many countries, professions, gender and age groups as a great place to work, most recently as one of the world's best workplaces by Fortune. As we look ahead to 2023, we feel optimistic about growth with high customer demand and exciting new product launches. Though the inflationary pressures and supply chain challenges will continue to impact next year, the strong growth outlook, combined with our pricing and cost actions, will position us well to return to strong earnings growth. I will now turn the call over to Jason.

Glenn Boehnlein:

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 9.9% in the quarter. The third quarter's average selling days were in line with 2021. The impact from pricing in the quarter was unfavorable 0.7%. We have started to see the positive impact of pricing initiatives, particularly in our U.S. MedSurg businesses, which all had positive pricing for the quarter. Foreign currency had a 3.7% unfavorable impact on sales. We continue to experience supply chain disruptions that have increased costs and led to inconsistent product availability. This is especially impacting the shipping and delivery time lines related to capital products in our MedSurg businesses. Nevertheless, our capital order book continues to be very robust as demand from our customers remained strong. In the quarter, U.S. organic sales growth was 9.2%. International organic sales growth was 11.8%, impacted by positive sales momentum across most of our international markets, specifically emerging markets, Canada, Japan and Europe, somewhat offset by lingering COVID impacts in other Asia Pac countries. Our adjusted EPS of $2.12 in the quarter was down $0.08 from 2021 due primarily to the impact of foreign currency exchange translation of $0.08. Additionally, higher costs associated with gross margin challenges were offset by the benefit from higher sales and cost discipline. Now I'll provide some highlights around our segment performance. In the quarter, MedSurg and Neurotechnology had constant currency sales growth of 13.5% with organic sales growth of 10.8%, which included 9.6% of U.S. organic growth and 14.4% of international organic growth. Instruments had U.S. organic sales growth of 2.2% led by our Surgical Technology business. From a product perspective, sales growth was highlighted by growth in smoke evacuation and Steri-Shield. During the quarter, Instruments experienced supply chain challenges primarily related to its capital products. Endoscopy had U.S. organic sales growth of 14% highlighted by double-digit growth in both the core Endoscopy and Sports Medicine businesses. Medical had U.S. organic sales growth of 13.7% driven by growth in our Sage and acute care businesses fueled by ProCuity and Prime structure demand. As previously noted, Medical continues to experience supply chain challenges that primarily impact emergency care products. Our U.S. Neurovascular business had an organic decline of 2% driven by a strong double-digit comparable in 2021, disruptions due to hospital staffing shortages and slower clinic volumes as well as competitive pressures. The U.S. neurocranial business had organic sales growth of 12.7%, which included solid growth in our Max space and Neuro products. Internationally, MedSurg and Neurotechnology had organic sales growth of 14.4%, reflecting double-digit growth in all businesses. Geographically, this included strong performances in Japan, China and other emerging markets. Orthopaedics and Spine had both constant currency and organic sales growth of 8.7%, which included organic growth of 8.7% in the U.S. and 8.9% internationally. This reflects the impact of our strong international growth and solid growth in our Hip, Knee and Trauma and Extremities businesses. Our U.S. Hip business grew 12.4% organically, reflecting strong primary Hip growth fueled by the recent launch of our Insignia Hip Stem and continued procedural growth. Our U.S. New York Knee business grew 14% organically, reflecting our market-leading position in robotic-assisted knee procedures. Our U.S. Trauma and Extremities business grew 10.4% organically with strong performances across all 4 businesses, led by double-digit growth in upper extremities highlighted by our new products Perform and BLUEPRINT. Our U.S. Spine business sales grew 2% from solid performance in our enabling technology business, somewhat offset by the impact of lower surgery volumes in the competitive environment. Our U.S. Other ortho declined organically by 11.2% primarily driven by the impact of the aforementioned delays in Mako installations in the quarter. Internationally, Orthopaedics and Spine grew 8.9% organically, which reflects the strong momentum in Europe as procedural volumes improve as well as strong performances in Japan, Canada and India, somewhat offset by COVID-related volatility in Australia. Now I will focus on the operating highlights in the third quarter. Our adjusted gross margin of 62.6% was unfavorable approximately 370 basis points from the third quarter of 2021, reflecting the impact of the purchases of electronic components at premium prices and other inflationary pressures primarily related to labor, steel and transportation costs as well as inefficiencies from supply chain disruption and the unfavorable impact of price and foreign exchange on sales. Sequentially, from Q2 2022, gross margin was 70 basis points unfavorable. This included the impact from unfavorable business mix, higher-than-expected inflationary pressures, including premium pricing and operational inefficiencies. We expect these adverse impacts to continue throughout the remainder of the year and into 2023. For the full year 2022, we now expect adjusted gross margin compared to 2021 to be adversely impacted by approximately 250 basis points. Adjusted R&D spending was 7.1% of sales, which represents a 40 basis points increase from 2021. This reflects our continued commitment to funding innovation and the related future growth that we'll provide. Our adjusted SG&A was 33.1% of sales, which was 100 basis points lower than 2021. This reflects the impact of an increased focus on discretionary cost control and head count discipline. In summary, for the quarter, our adjusted operating margin was 22.3% of sales, which was approximately 310 basis points unfavorable to the third quarter of 2021. This performance is primarily driven by the aforementioned gross margin challenges and the net negative impact resulting from foreign currency exchange translation, somewhat offset by cost discipline. Adjusted other income and expense decreased from 2021, primarily resulting from lower interest expense and favorable interest income. We anticipate Q4 OI&E to be approximately $70 million. Our third quarter had an adjusted effective tax rate of 14.5%, reflecting the impact of geographic mix and certain discrete tax items. We now expect our full year adjusted effective tax rate to be at the low end of our previously communicated range of 14.5% to 15%, which is slightly lower than 2021. Focusing on the balance sheet. We ended the third quarter with $1.5 billion of cash and marketable securities and total debt of $12.8 billion. Approximately $250 million of term loan debt was paid down in the quarter, which brings our year-to-date payments to $500 million. Turning to cash flow. Our year-to-date cash from operations is $1.6 billion. This performance reflects the results of net earnings, partially offset by the impact of higher costs for certain electronic components, pre-buying of certain other critical raw material inventory and seasonal inventory increases. Considering our third quarter results, our strong order book for capital equipment and the sales momentum in our implant and capital businesses, we now expect full year 2022 organic sales growth to be in the range of 8.5% to 9%. If foreign currency exchange rates hold near current levels, we now expect net sales in the full year to be adversely impacted by approximately 4% and adjusted net earnings per diluted share to be adversely impacted by approximately $0.35 to $0.40 for the full year, which is included in our revised earnings guidance range. Based on continuing inflationary and supply chain pressures, balanced with our strong sales and additional cost-reduction actions and most significantly, the anticipated future impact of foreign currency, we now expect adjusted earnings per share to be in the range of $9.15 to $9.25. And now I will open the call up for Q&A.

Robert Marcus:

Congrats on a really nice top line here. That said, I do want to ask my first question on operating margins both for third quarter and fourth quarter. And it came in a lot lower. It looks like half was for currency. I think -- what I'd like to know is how much of what we saw to the negative was transient in third quarter. And what's driving the strong sequential improvement into fourth quarter here?

Robert Marcus:

Great. And as we go into 2023, where I think everybody is starting to focus, I don't think there's much issue with the top line with 9.9 in the quarter, 8.5% to 9% for the year. That looks really good. I think people feel comfortable into next year. Where there's questions is down the P&L and on EPS. And Kevin, you mentioned the comment about strong EPS growth next year. I see The Street -- my numbers looks north of 50 basis points margin expansion. Next year, which might be a little high given the trends we're seeing here, would love to hear if you have any initial comments on thoughts on 2023 and particularly what that strong EPS growth means.

Operator:

Our next question comes from Lawrence Biegelsen with Wells Fargo.

Glenn Boehnlein:

Yes. Larry, I think not to give specific guidance on numbers relative to the disruptions, but suffice to say that on some products, we are very hand-to-mouth in terms of how we're getting componentry to complete those products and ship them to customers. On some, we have a little bit better visibility. I would tell you that with our order backlog at an all-time high, we are seeing pretty significant disruptions across our capital businesses. We're very focused on getting product to customers. We know that's important. And we are working hard to make sure that as we can secure supply that we work around the clock to get those products finished and get them out to customers.

Larry Biegelsen:

That's helpful. And then maybe a little bit more color on the softness with Mako this quarter. How confident are you in the rebound in Q4? And Glenn, I know the other line is not just Mako, but when can we expect to see that line turn positive?

Glenn Boehnlein:

Yes, Larry. The only thing I'd add is there are a couple of products in that line item other. But yes, you're right, that's where Mako is. I don't really want to guide you on Q4. I think sequentially, we will definitely see improvement. But in terms of when will we see full positivity, we'll talk about that in January.

Operator:

[Operator Instructions] Our next question comes from the line of Vijay Kumar with Evercore ISI.

Kevin Lobo:

Okay. Sure. I'll stay in the land of qualitative, Vijay, at this time of the year. But first, we are seeing a tailwind in procedural demand. So procedures are recovering around the world, a little slower in the Asia Pac regions. But given what happened with COVID, we expect that tailwind, as you saw, with very good growth in our Hip and Knee business that will continue into fourth quarter and I think a pretty modest or moderate tailwind in throughout 2023 and maybe even into 2024. So that's one positive tailwind. We have a number of new products we're launching

Glenn Boehnlein:

Okay, Vijay. Vijay, the -- on the FX rates, without overly guiding for next year, but I think if you look at sort of what happened in 2022, rates really took off in sort of Q3, Q4. And so the comparable for Q1, Q2, I still think will have a pretty big impact for rates next year as you look at sort of your modeling for next year. And then in terms of just the capitalized variance piece, we -- I won't give you specifics. But I will remind you that to the extent we are making spot buys, it relates to raw materials that get put in inventory, and then the future utilization of those raw materials is usually over an 8- to 9-month time frame. So that gets a little bit more -- to Kevin's comment, that we'll still feel some of this into -- well into Q2 of next year. And to the extent we're still in a spot-buy-premium situation in Q1 of 2023, then that will bleed into, say, Q3 as well.

Pito Chickering:

The first one is the messaging has been very consistent throughout this year about the strong capital demand. And understand that there's a give and take between backlog of orders because the orders to fill orders canceled and new orders. So I guess, can you talk specifically on new orders during 3Q and what you're seeing for 4Q against your expectations?

Kevin Lobo:

And even Endoscopy, who had a very strong Q3, they grew their orders as well in the quarter. So they will also have another strong quarter in Q4. So it's really across our portfolio where the demand is very, very strong. And we're not seeing sort of a capital slowdown, which I know I've heard out that some other companies mentioned. We're just not seeing that in our orders. We're not having orders canceled. It's kind of -- it's something I haven't seen in my tenures here, customers ordering things and then canceling it. So we feel very good about our position. Our orders have not slowed down. They just continue to grow. Just one little example, which I really enjoy is on Vocera, we've now integrated that with our ProCuity bed. So the alerts for falls from the bed actually goes straight to the badge, and we're already showing this to our customers and getting really wild positive feedback from customers on this. And again, it's early days, but the ProCuity momentum, which really powered our strong Medical growth this quarter, is just building. And it's kind of the second year of the launch. It's really just gaining steam. And now with its interoperability with Vocera, that provides an extra bit of energy to that business.

Kevin Lobo:

Yes. Thanks. We've seen a slow market this year in the U.S. in Neurovascular, not exactly sure why. There's a number of different theories out there as to why the market itself has been slow. I'd say that's probably most of it. But there are new competitors in both aspiration as well stent retrievers. The FDA has kind of reduced the requirements -- the clinical requirements in those categories. So there are a number of new players which affects part of it. But the market has been soft. And maybe it's a COVID issue that some of these patients that would have had strokes are not having stroke because of the mortality effects of COVID. It's hard to know exactly why, but the market has slowed down definitely in the U.S. I think that's probably the bigger portion, but there are also some competitive pressures. Keep in mind that for us, the U.S. is much smaller than our OUS business in Neurovascular, has always been that way. It's the one business that kind of has the reverse of the rest of our portfolio. So we continue to feel bullish about the long-term prospects on this business. We're only treating a small percentage of people that have strokes. And as I noted in my opening remarks, we've just completed signed an agreement for a tuck-in acquisition in the intraocular space.

Matthew O'Brien:

The first one is just on the restructuring you talked about. Is that something that's going to be impactful to next year, specifically to help drive that at EPS growth? And then do you have other levers that are kind of below the line that you can pull on that to help with the EPS growth for next year?

Glenn Boehnlein:

And Matt, below the line, if you look at sort of in an taxes, it's -- there are some opportunities related to how quickly we pay down the term loan. So there could be some pickups relative to interest expense, although those would be minor given the rates. And then taxes is -- I don't expect any surprises, sort of steady as we've been there.

Kevin Lobo:

I was going to say one last comment before. We will get mix benefits from the new products that we launched. So that's one thing to -- and you won't see that in the price line, but we'll definitely get that benefit through the P&L, which helps our earnings.

Kevin Lobo:

Yes. You know what, we're not ready to give you a time line now. I wouldn't expect it next year. But in one of the next upcoming calls, perhaps January or the one after that, we will give you some expected time lines. The reason that they're coming out at the same time now, there's two things. One is Spine's kind of moved ahead in its pace, and shoulder kind of moved back a little bit because we had to adapt to the Tornier implants and bring in the BLUEPRINT software and marry that with Mako. So we were on a certain time line with Stryker shoulder implants, but we wanted to switch to the Tornier implants. They're the market-leading implants. So we had to sort of delay that one. But Spine has been moved forward. So the team has done a terrific job. We had two projects that we are pursuing

Joshua Jennings:

I wanted to start just on pricing. It sounds like guys are getting some traction there on your pricing initiatives. Should we be thinking about price turning positive? I think it's 70 basis points headwind in 3Q. Or is that too aggressive? Just wanted to get a better sense. And the follow-up question is just on just the ASCs with your ortho business, but primarily joints. Any updates just in terms of receptivity for Mako robots? And also just the pace of ASCs opening, and that seems to be maybe the bottleneck in terms of the pace of migration overall orthopedic procedures into ASCs. But wanted to just get a better sense of what you're seeing in ASCs as well.

Kevin Lobo:

Okay. And related to your question on ASCs, we -- our offense continues to exceed our expectation. Just the bundle that we provide for the ASC to make life easy for them has been very well received. Close to half of the deals that we win includes a Mako in these orthopedic ASCs. We've now crossed sort of the 10% mark of large joints that are done in ASCs. It keeps going up, not at a rapid rate, but it's a steady climb. And to your point, the gating factor is just construction and refurbishment of these ASCs to enable more procedures. But every hospital system I talked to is preparing themselves for another -- a new ASC. It's a trend that had started prior to COVID and has accelerated. And we expect that, that will continue. But we love our position. The breadth of our portfolio, having capital disposables and implants puts us in a really leading position. And Makos, as I said, almost all the time are included, and that gives us a giant advantage.

Matthew Miksic:

A lot of great color as been covered here. But I'd first just love to see the interoperability and connected care comments around Vocera and just color around Mako spine and shoulders is exciting. I wanted to just maybe focus a little bit back to margins on some of the purchasing comments you made, Glenn. And just to get a feel for how much of what impacted you in the third quarter had to do with spot buys purchases made in previous quarters. And whether any -- I think you mentioned that some of those prices are getting a little bit easier, which -- or better maybe, which then -- is that -- have we hit a high watermark in terms of the sort of impact on margins or is it too early to say? And I had one follow-up.

Matthew Miksic:

Got it. That's helpful. And then maybe just one of the dynamics, Q3 to Q4, you mentioned that product mix was a bit of a headwind for you in Q3. Maybe if you could highlight some of the ways in which -- if you expect that to improve in Q4 or Q1. And around that, in particular, it seems like your businesses are sort of seeing a better look from some of the staffing challenges in hospitals than some other companies. And not everyone is seeing improvement. So just wondering how you think about what you're seeing in priorities of its and needs versus other procedures. Any color that you're getting that would kind of help folks understand what exactly is happening, what's happening and how it's maybe unevenly affecting different procedures and different settings?

Kevin Lobo:

Yes. Just last point on mix. I think Australia is one of the big, big markets for Stryker. And they've been hit by COVID and delays, and they do expect a stronger -- it's already started. We're seeing that start to build, and that's a highly profitable business as well. So those are -- that's another element of mix we're going to see improve in Q4 versus Q3. And then your other question, I'm not sure I totally got it, but I think you were talking about different procedures and how we're seeing the recovery and clearly get the needs. We're seeing robust recovery. There's big waiting lists, which in the U.K. and physicians who took -- maybe took some time off in summer a little bit more than they normally would, given coming off the COVID are very busy now, and they're starting to operate more. As much staff is available for them, the more they're going to operate. And staffing is still a little bit challenged, but it's been gradually improving. So there, we see robust kind of growth going into next year. Spine has been a little bit more choppy, to be honest. And I don't think it went down as much as the needs did. If you look at the Omicron variant and everything that -- spine procedures were still a little bit more resilient. And so we're not seeing that pop quite at the same extent as we are in our Hip and Knee. And I mentioned already Neurovascular in the U.S. where the market is soft, and that's the one that -- I saw some comments related to TAVR that talked about the market being a little bit soft. And I wonder if that patient profile with all these comorbidities, there might be something similar that could be impacting the ischemic stroke portion of the market. So that's -- hopefully answered that part of your question.

Rick Wise:

Kevin, two questions for me. First, we've touched on it a little bit, but you talked about Asia Pacific being -- continuing to be volatile and China negative growth and that -- those pressures continuing through the end of '22. Just in general, at a high level, are you -- what's the setup for next year? Are you assuming as you look at the landscape that things are going to get better? Just, again, your high-level thoughts there?

Rick Wise:

Great. And one other sort of big-picture question, Kevin. I mean you usually have great perspectives on this kind of stuff. One of the toughest questions to answer for me is how, when, where do some of these supply chain issues, particularly around chips, how does it get resolved? When does it get resolved? And I'd be curious to hear what you're thinking for the industry. But what are you thinking -- how are you going to resolve this so that you can stop boring about it for Stryker? Is it just you just have to wait? Or are there tangible steps that you can take or the industry needs to take still to get past this topic? Appreciate that.

Operator:

Next question comes from Drew Ranieri with Morgan Stanley.

Kevin Lobo:

Yes. I'm very bullish on ProCuity. It's a fantastic product, and the cross-sell capability with Vocera, where we were strong, let's say, with ProCuity or beds and Vocera wasn't as strong or Vocera. Conversely, Vocera was strong, but we didn't have a strong bed position. That cross-sell opportunity is already presenting itself. We've been in front of some very big accounts, and we're showing them this integrated system. And we've already gotten some orders. And so I'm bullish. It had a terrific third quarter. We're trying to make them as fast as we can right now, which is a high-class problem. And so I think you're going to see very good results for ProCuity. It's a winning bed, and Vocera is just going to add gas to the fire.

Glenn Boehnlein:

Yes. I think right now, just given all the variability in kind of where we are, we're just focused on this year and finishing up. I'd hate to throw out a number for free cash flow conversion. I think it would be safe to assume that it wouldn't be far away from our historical averages, and that's probably where we would land for next year. Keep in mind, for next year, our focus will still be debt repayment. And we'll pay down the rest of that term loan before we allocate other capital to M&A.

David Saxon:

Maybe to start on extremities. Just wondering what you're seeing in the foot and ankle market. Did any procedures perform better or worse than others? And then I'll ask my second question upfront here. Maybe can you talk about the Q Guidance System, how that early launch is going? And maybe you can touch on the launch strategy, pricing and feedback you got from NASS.

Operator:

Next question comes from Steven Lichtman with Oppenheimer.

Jason Beach:

Yes. I'd say a couple of different things just as you think about that and think about capital. Obviously, our larger capital is beyond Mako, right? But what we're seeing is sometimes I think when we talk about staffing challenges, people go right to nurses and some of those things. But really, what we're talking about here is even like if you think about our comm business, you'll have scheduled installations. People show up to do an install. They'll get canceled. They'll have to come back. And so that's the variability that I'm referring to that sometimes delays installs, and ultimately, revenue and gets pushed out. Glenn, in terms of second piece?

Steven Lichtman:

Yes. So Glenn, just my -- the follow-up for Glenn, just one variable for next year I wanted to ask you about is FX. So I mean based on where rates are today -- I mean, you talked about some of the -- qualitatively about the impact next year, but would the impact next year versus this be about the same as what you're seeing this year versus last based on where rates are sitting today?