Q4 2019 Earnings Call

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Following the conference we will conduct a question and answer session.

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This conference call is being recorded for replay purposes before we begin I would like to remind you that the discussions. During this conference call will include forward looking statements factors that could cause actual results to differ materially or discussion that companies. Most recent filings with the SEC Also the discussions will include certain non-GAAP .

GAAP financial measures.

Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release. It as an exhibit to strikers current report on form eight dashed K filed today with the FCC.

I will now turn the call over to Mr., Kevin local Chairman and Chief Executive Officer, You May proceed Sir.

Welcome to strikers fourth quarter earnings call joining me today, our Glenn Boehnlein, Stryker, CFO and Katherine Owen VP of strategy and Investor Relations.

For today's call I'll provide opening comments, followed by Catherine with an update on maker.

Glenn will then provide additional details regarding our quarterly results.

Before we open the call to couponing.

We finished 2019 on a particularly strong note Q4 organic sales growth of 8%, despite notably difficult year over year comparisons.

This performance helped propel full year organic revenue growth <unk>, 8.1%.

Upping the high end of our most recently raised target upsetting a half to 8%.

2019 marks the seventh consecutive year of deliberating accelerating organic sales growth, which has consistently been at the high end of Med Tech.

In 2013 in 2014, we grew in the Fives organically 15, and 16, we grew and the Sixs and 17 and 18 it wasn't a sevens.

Also this past year marks our fortyth consecutive year of sales growth since Stryker went public in 1979.

Performance in 2019 was a balanced across divisions and geographies.

What can the durability of our business model.

Turning to the results by our three segments Q4 was led by over 12% organic sales growth for Neurotechnology and spine.

With our Neurotechnology businesses growing in the high teens.

Orthopedics posted a 7.3% organic sales increase in the quarter powered by impressive double digit growth in knees.

Orthopedics performance continues to reflect meaningful share gains fueled by maaco and our threed printed influence.

As Kathy will detail in her comments Q4 delivered the strongest robot quarter since the launch it may go.

We finished the year with a healthy order book, demonstrating the commercial and clinical success of this highly differentiated technology.

Medsurg was up roughly 7% organically in the quarter as endoscopy led the way growing 10%.

All other divisions achieved mid single digit gains despite challenging comparisons.

Sure. It's continues to be a strong and consistent grower year in and year end.

International organic growth was 7.6% in Q4 and for the full year matched the U.S. growth rate of 8.1%.

Emerging markets led the way with strong double digit gains in Q4 and the full year.

While it has taken some time 2019 was an excellent year in emerging markets and we are well positioned to continue this momentum into the future.

Europe once again registered full year organic sales gains in high single digits as we make progress towards achieving similar market share levels as we have in other developed market regions.

This performance was well above the market and a significant runway as we continue to drive sales force specialization.

Australia, New Zealand also had a strong Q4 across its portfolio.

In the past seven years, we've strengthened our international businesses.

Taking key steps to strengthen category leadership across our portfolio.

The pending addition of Wright medical later in 2020, well addressed our last meaningful category leadership gap.

Her extremities.

We continue to make investments in our sales marketing and R&D teams around the globe in order to support our goal of consistently growing at the high end of Med Tech.

But with our focus.

On our cost transformation for growth initiatives. We're also delivering leverage off margin expanded roughly 40 basis points in the year, which included absorbing approximately 30 bips of dilution related to acquisitions.

We exited 2019 with nearly $15 billion in global sales and haven't demonstrated the ability to continue to drive high growth despite our larger size.

We have expanded our offerings through internal investments and acquisitions and believe we are well positioned to achieve continued success for our customers employees and shareholders.

Looking at 2020, we are on track to continue achieved strong organic sales growth and leveraged earnings in closing the tremendous efforts of our 40000 employees around the globe enabled us to once again chief strong results.

And deliver on our promise to our customers in patients to make health care better with that I'll now turn the call over to copper.

Thanks, Kevin My update today will focus on May go and the key data points that allowed you to track our success in executing on our orthopedic robotics strategy.

In Q4, we sold 89 make a robots globally are consistent for in the comparable quarter a year ago. This includes 63 in the U.S. in Q4.

Globally, our installed base of robots is approximately 860 with close to 700 in the U.S.

In January we received Japanese approval for the maaco partial knee indication, adding to the indication for the total knee and total hip procedures. We now have now I make a robots in Japan and continue to believe this represents a significant market opportunity.

Looking at U.S. procedure in Q4 make all procedures increased nearly 50% to 36600, bringing the full year total to over 114000.

Total knee procedures posted a roughly 59% increase in Q4, two approximately 24000, while full year Mako knee procedures increased roughly 66% talking 75000.

Demand for make I was being driven by a myriad of unique benefits of our robotic technology multiple reconstructive applications and the ability to perform a cementless knee makos smart robotics have enabled surgeons to achieve a no more him. So with the caitlyn approach to joint replacement, which is driving improved outcomes for patients.

These capabilities are clearly helping to increase robotic utilization rate would you trees don't strong double digit growth both year over year and sequentially Lastly, it's worth noting that demand for threed printed cementless knees continued to climb exiting the year at over 36% ever U.S. knee procedures.

We also continue to see growing demand for the May go hip application underscored by over 40% growth and have procedures on may go in 2019.

Please note that going forward, we will no longer be providing quarterly may go result, since acquiring the company in early 2014. We have provided detailed may go data for 23 consecutive quarters in order to allow investors to accurately track the performance of the differentiated robotic technology as we are now six years since you have.

Acquisition in nearly five years since the initial launch of the told me indication. We believe we had validated the strategic rationale competitive advantage of maaco as witnessed by the roughly 600 basis points of U.S. Mi market share that we have gained since 2013.

Going forward, we continue to expect to take meaningful market share in need owing to make all along with our differentiated portfolio with new products, including our Threed printing implants. We will continue to report on a combined basis, both manual and May go implanted needs and our knee line well robot sales will be reported in other orthopedics to allow for act.

You're tracking of our new revenue looking at 2020 or make order book remains robust and supports our expectation for continued share gains in both hips and knees with that I'll now turn the call over to Glenn.

Thanks, Catherine today, I will focus my comments on our fourth quarter financial results and the related drivers are detailed financial results have been provided in today's press release.

Organic sales growth was 8% in the quarter as a reminder, this quarter included the same number of selling days as Q4 2018.

Pricing in the quarter was unfavorable 0.6% from the prior year, while foreign currency had an unfavorable 0.2% impact on sales.

For the quarter U.S. sales continue to demonstrate strong momentum with organic growth of 8.2%, reflecting solid performance across our portfolio International sales grew 7.6% organically, which was balanced across our international regions.

Organic sales growth for the year was 8.1%, which was slightly above our most recently raised full year guidance or 7.5% to 8%.

You asked international organic growth was also a one 8.1%.

Any 19 had one additional selling day compared to 2018 and for the year price had an unfavorable impact <unk>, 0.9% on sales.

Our adjusted quarterly EPS of $2.49 increased 14.2% from the prior year, reflecting strong drop through on sales growth combined with good operating expense control our fourth quarter EPS was negatively impacted by two cents from foreign currency, which was <unk>, which was in line with our expectations.

Full year EPS was $8 in 26 cents with growth of 13%, reflecting strong sales growth and discipline leverage now I will provide some highlights run our segment performance.

Orthopedics delivered constant currency and organic growth of 7.3%, including organic growth of 7.2% in the U.S. highlighted by us knee growth of 10.5%.

This performance reflects strong demand for our maaco teekay need platform Threed printed products tried into hip implants and continued ramping of our t. to alpha nailing system.

Nationally orthopedics delivered organic growth of 7.6%, which reflect strong performance in Australia, Canada and Europe .

Med search continued strong growth across all businesses in the quarter with constant currency growth of 7.4% inorganic gains of 6.8%, which included an 8% increase in the U.S.

Instruments at U.S. organic sales growth of 4.1%, reflecting a strong prior year comparable full year U.S. organic growth for instruments was 10.2%.

In the quarter sales growth was driven by gains in waste management stair shield and smoke evacuation.

Endoscopy delivered U.S. organic sales growth of 15.4% endoscopy had strong performances across many product lines highlighted by double digit growth and its video products, including the 16 88 Cameron accessories.

Later section irrigation and booms and lights businesses.

The medical division at U.S. organic growth of 5.7%, reflecting solid performance in its debt, including services and structure businesses.

Internationally metasearch at organic sales growth of 2.4%, reflecting strong comparable across most geographies.

Neurotechnology and spine at constant currency growth of 18.2% inorganic growth of 12.5% as key to anniversary during the quarter. This growth reflects strong performance within our neurotech product lines.

Our U.S. Neurotech business posted organic growth of 16.5% for the quarter driven by strong demand for our hemorrhagic scheming stroke in our neuro powered instruments products, including Sana, Pat I Q.

During the quarter, we continue to be ahead of our K two m. cost integration plan and begin to see good momentum related to our sales integration efforts.

The quarter, we delivered an increase in sequential quarterly growth and on a full year pro forma basis delivered low single digit increase across our combined worldwide spine business.

Internationally, Neurotechnology and spine had organic growth of 16.6. This performance was driven by strong demand in Europe and emerging markets.

Now I will focus on operating highlights in the fourth quarter.

Our adjusted gross margin of 66.3% was favorably with favorable approximately 60 basis points from the prior year quarter.

Compared to the prior year quarter gross margin expansion was favorably impacted by acquisitions and foreign exchange, which were partially offset by price and business mix for the full year. Our adjusted gross margin of 65.9% was unfavorable approximately 20 basis points from the prior year compared to the prior year gross margin expansion.

Was favorably impacted by acquisitions, which were offset by price foreign exchange and business mix.

Adjusted R&D spending was 5.6% of sales, which was 10 basis points lower than prior year quarter. The full year adjusted R&D spending was 6.1% of sales.

Our adjusted EPS, DNA was 32.3% of sales, which was favorable to the prior quarter by 10 basis points.

For the full year, our adjusted EPS DNA was 33.5% of sales, which was favorable to the prior year by approximately 40 basis points.

For both the quarter end the year. This reflects continued focus on operating expense improvements do our cost transformation for growth program, including key projects focused on indirect purchasing and shared services.

This is offset by the negative impact of acquisitions and continued planned investments and other CTG program efforts like our ERP project.

In summary for the quarter are just rated or adjusted operating margin was 28.3% of sales, which was 80 basis points favorable to the prior year quarter. Our full year operating margin of 26.3% was up 40 basis points favorable from the prior year delivering on our commitment of 30 to 50 basis points.

Margin expansion, our operating margin primarily reflects good leverage and continued operational savings offset by investments and acquisitions, the latter which had approximately 30 basis points negative impact for the year.

Next regarding other income and expense our expenses decrease from prior quarter, primarily due to favorable interest rates.

Our fourth quarter had an adjusted effective tax rate of 16.3% our full year effective tax rate was 15.8%.

These rates reflect a higher operating tax rate reduced primarily by the benefit related to stock compensation expenses.

For 2020, we expect full year adjusted effective tax rate to be in the range of 15.5% to 16.5%.

Focusing on the balance sheet, we continue to maintain a strong position with 4.4 billion of cash and marketable securities which includes the proceeds from our 2.2 point 4 billion Euro offering completed in December to partially fund the announced Wright medical acquisition.

Including this funding total debt on the balance sheet was 11.1 billion.

Turning to cash flow our year to date cash from operations was approximately 2.2 billion.

This reflects increased adjusted earnings which are somewhat offset by increases in working capital and increased acquisition integration and restructuring spending.

Turning to cash flow for 2020, we will not be repurchasing any shares and we anticipate the capital expenditures will be flat year over year at 600 to 700 million.

And now I will provide 2020 guidance on a stand alone basis, and further guidance, including Wright medical.

Based on our momentum from 2019 and assessment of the current economic and market conditions, we expect organic sales growth to be in the range of 6.5 to 7.5 for 2020.

Theres one additional selling day in 2020 compared to 2019 as you update your quarterly models. Please note that Q1 has the additional selling day in Q2, Q3, and Q4 of the same number of selling days.

Foreign exchange rates hold their their current level, we anticipate sales and EPS will be nominally impacted for the first quarter and full year.

We also expect continued unfavorable price reductions of 1% to 1.5%, which is fairly consistent with the pricing environment experienced in 2019.

In addition, we Didnt, we expect to continue to deliver on our full year commitment to expand operating margin.

Including the Navy negative impact of closed acquisitions, we anticipate expansion of 30 to 50 basis points of operating margin in 2020.

Finally for 2020, we expect adjusted net earnings per diluted share to be in the range of nine to 920 for the full year.

Including approximately two five and to 10 for the first quarter.

As it relates to Wright medical acquisition, we reiterate our previous guidance, assuming an end of Q3 2020 closing we expect the transition transaction to be neutral to our 2020 EPS for the full year 2020, we would not deliver on 30 to 50 basis points op margin expansion on a combined basis.

However, we would still expect to deliver positive operating margin expansion.

And now I will open up the call for Q and I.

Thank you we will now begin the question and answer session.

You have a question you will need to press star one on your telephone.

If you wish to be removed from the Q press, the pound or hash key.

As a reminder, callers will be limited to one question and one follow up question.

Your first call comes from the line of Bob Hopkins with Bank of America. You May proceed.

Oh, Thank you and good afternoon.

My first question is for Kevin I was wondering if I could get your perspective on the 2020 guide.

Last year, obviously, you guided to six and have to seven half and ended up delivering over age.

This year your once again guy in the six and have to seven half is there anything.

On a different Kevin with your outlook for 2020 versus 2019, either from a macro market perspective, or or kind of a stryker specific perspective.

Yes, Thanks, Bob I would say as I sit here today I feel very similar to how I felt at the beginning of last year.

A really nice balance of headwinds and tailwinds.

Good operating performance across our businesses and our regions, but it's early in the year and so we're getting a guidance that we feel very confident be able to hit if things play out the way. They did in 2019, obviously that could be a scenario where things would improve but we really had a great year across many areas in 2019 and not a lot of turbulence in the macroeconomic environment.

Okay. That's that's fair and then I was wondering if you could just quickly comment on a couple of other quick things first from a pipeline perspective, you guys still expecting a new bed and new physio launch sometime in 2020.

And then I know this is a tiny business for you, but I'd love to get your perspective on krona virus and could that could that impact procedures in China.

Thank you Hey, Bob I'll take the first part just talking about some of the positives that we see the pipelines are very strong across all of Stryker robotic surgery adoption as you saw with the big fourth quarter continues to be a tailwind for us both in hips and knees as well as maaco, we have here two of our camera launch in endoscopy, our aspiration business.

In neurovascular will be another tailwind.

We have acquisitions that are going to be turning organics, we have a whole list of those kind of tailwinds and then across the medical Theres a number of new products that will be launching an acute emergency care and sage.

And Bob maybe I'll just hop on to that really too early to get into details about compounded viruses.

Probably know our exposure in emerging markets is low and in China, It's even lower its low single digits and that's one of the variables, we often contemplate when we set out a range. So at this point recognizing it's early no comments and just building on Kevin's comments on the as you mentioned medical does have a really healthy pipeline of products coming.

Including a bad.

I should not be also note, though lifepak, which is one of the physio products at the PMAG product that is no longer expected to be launched this year again thats a good overall a lot of products. So it's not impactful from a revenue standpoint, but that will not be launched this year.

Your next call comes from the line of David Lewis with Morgan Stanley You May proceed.

Good afternoon, congrats on a nice quarter just two questions from me one on sales and one on one on margin so Kevin to businesses stuck out this particular quarter knees and neuro. So just sort of curious what drove those very significant maaco placements and in any way was there a change in sales strategy from capital to rental and the neuro.

I guess, what the drivers were in the fourth quarter, we've sort of waiting for that pipeline to come through we're expecting a big year end 2020, plus the fourth fourth quarter kind of the first beginning of that and how you think about narrow for next year and then had a quick follow up on earnings.

Yes, so starting with Mako. This is just a continuation of the of the great success. We've been having there was no new strategy. There's no change in the way we price maaco, we've always been flexible in terms of different approach to financing whether its leasing whether its rentals and so the mix didn't change dramatically, maybe a little bit more rentals, but very very similar to what we've had in.

The past I think it's just there's a growing realization that technology is here to stay.

And that adoption rate because we expect to continue to increase in the future.

Yes, and David on the neural it was really across the board both geographically strong double digit growth in the U.S. in Europe in Canada as.

As well as other regions outside of Tom and then the various pigment business segments, all had really healthy double digit growth that you're looking at.

Hemorrhagic or a scheme, Nick and that really across the board, we launched a new products last year I knew flow diverter outside the U.S. and.

And part of our bullishness heading into this year, it's tied to the.

Plan, having the full portfolio around the end of Q1 of our aspiration products, including the larger board Oh seven for so that should be a nice new product entry for us into that segment of the market. So it's very balanced both geographically and across the product portfolio.

Okay, and then just a quick on earnings Kevin. This is a very focused on organic acceleration in this was yet another year end 2019 of acceleration over over 18, but what's interesting is that to the second consecutive year earnings acceleration, which I think some investors have missed so I think you're right in the associated dilution is concerned investors on your opportunity for improving leverage our earnings growth.

Company. So your conviction in the minimum 9% is clear, but the question really as it can you do better in is right integration going to delay your cost transformation initiatives. Thanks, so much.

Yes, thanks, David So four years ago, we gave my percent as a floor and since then we've delivered 12 and 13% each of the four years. So we saw it as a floor and you can see we've clearly surpass the floor by a wide margin.

We really believe we have our cost transmission growth for growth firing.

And we're going to continue to be able to deliver very strong earnings. The point on op margin is obvious just math issue with the amount of good growth that were coming in and that the profile of their PML it'll take us time to work through the synergies that we need to work through for to get back onto an op margin expansion, but as you heard from Glenn we expect that still deliver positive.

Margin in 2020.

Your next call comes from the line of Matt Miksic with Credit Suisse. Please go ahead you May proceed.

Hi, Thanks, so much for taking the question and congrats on the is really strong numbers.

So.

Kevin I wanted to ask if you could maybe Katherine talk a little bit about.

Where.

We should think about.

Sort of progress or the timing cadence around the around upper extremities given the.

That is at that's an important part of this Wright medical acquisition, it's certainly fits well with the with tomato platform.

Maybe talk about how that deal fits and what it can do to maybe accelerate that program and then I had just one follow up.

Yes, we've talked about on prior calls we continuing to prior to prioritize in terms of next indications in spine and <expletive> I for extremities format Goliat independent R&D teams working in collaboration with the naked robotics team on knows it's too early to get into the timeline I think what right.

We'll do for US as we said before significantly bolsters, our competitive position so when we come to market.

We will have a stronger portfolio of products, but it'd be premature to comment beyond that in terms of timing around around the robot launch for either of those additional indications.

Understood and then maybe just a follow up on on spine.

What what if anything.

If you can provide any color as to what you think is sort of gone well there.

And obviously did a lot of things right.

I think but but maybe where where some of the challenges have been as things evolve last quarter, So and where in that portfolio. Do you think the integration is going really well any color you could Brian would be would be helpful.

Yes, Hi, this is Kevin So certainly we had some challenges early with the integration with the overlapping sales forces and didn't do a lot of hiring new products got delayed.

The fourth quarter showed some real signs of positive momentum on the Salesforce side clear targets cleared accountabilities and.

And then a number of new products being launched at our sales meeting. So very excited that were sort of back on offense after going through the the tricky parts of the integration we were very aggressive on costs and so those cost synergies. We're ahead, but now I'm looking forward to 2020 in the future to seeing accelerated growth in our spine business, we're well positioned now it was tough.

Certainly the first six months, but very encouraged by what I saw in the fourth quarter and expect 2020 to accelerate.

Your next call comes from the line of Peto Chickering with Deutsche Bank You May proceed.

Good afternoon, guys. Thanks for taking my questions and really what are the great quarter I'm sort of digging into the spine question as well last quarter, we saw a demand supply imbalance coming from for K to them versus legacy spine can you give us a manufacturing update where are we on the supply versus demand at this point.

Thank you for the Tailwinds in the near term if demand remains at at these levels going forward.

Thanks, Peter I would say, it's improved and that's really the trajectory is on spine is there still improvement to golf course, because we still have legacy spine products.

The manufacturing that we're optimizing and but the fact that it is improving you saw the sequential improvement we feel great that we hit the revised target of low single digit spine growth and we feel really confident that the trajectory will continue to improve to get us to that acceleration throughout.

2020, and that part of that is having a bit better capability to meet that demand for the full portfolio of products.

Great then one more question.

So.

What I'm, saying that there's dilution from acquisitions in 2018, you guys had been very clear about.

Going into 2020, how should we think about core stryker delivering margin improvement with the organic revenue growth versus simply having less dilution to deal with in 2021st 2019.

Oh.

Yeah, I think on 2020, as we think about it in the way we've we've almost segment and planned on it even in spite of the right acquisition is.

For the core business and maybe are smaller tuck in acquisitions that we would normally do in the course of 2020, we will still strive and we will still and incentivize our people in our businesses to deliver the 30 to 50 basis points expansion.

Think it's Kevin explain just mathematically with what will average in on a combined basis that sales and if that op income line.

We won't be able to hold 30 to 50 basis points expansion for 20 for 2020, when we close on Wright medical but but we do have continued.

Dilution because of the Mobiuss deal that we did at the end of the year in some other deals maybe down to the same extent that we had this year, but we still do need to offset that dilution and we are committed to continuing to deliver 30 to 50 in spite of that and obviously of dilution decreases.

We expect to be at the higher end that limit.

Your next call comes from the line of Rick Weiss with Stifel. You May proceed.

Good afternoon, Hey, Kevin.

Hi, Let me go back to make go and.

A couple of questions there just to.

Particularly around May go ahead.

It's what's next there can you give us any color about.

Drivers of adoption from here and your plans and just help us appreciate to so many initiatives that are ahead in 2020, maybe Catherine you will tell us and on.

The mix of Stryker accounts versus competitive.

50, 50 continue at that kind of level.

Sure I'll start off with Mako hip really excited about the progress. So a lot of surgeons were initially interested in the need and then as they continue to experience with maaco. They start to look at it had been once you try the hip application it tends to be pretty sticky.

We're very excited in the second quarter of this year, we're going to be launching their software upgrade to our hip program and that's going to be much more user friendly the registration process and and some of the the software has been a little bit challenging from a change management standpoint. This is going to be much slicker really exciting that feed and early feedback about the surgeons has.

Been very positive so I'm bullish on continued expansion of maker with hips.

So.

We've seen very good.

Hovering around that 55% to 60% of the robots, we placed or going into competitive accounts and that was consistent again to the quarter in the year.

Okay, and just a follow up question, Kevin you have done an amazing job in transforming Europe and had a great performance seems like there's a lot more to go based on your comments and just.

At a high level as as we look into 2020.

And maybe beyond.

Beyond some of your comments about spine, you're feeling better are there other areas, where you're turning special focus that we might imagine could based on that focus just like Europe .

Performed better as 2020 unfolds or.

Where do you what do you less than satisfied with thank you so much.

While it was a terrific year as you saw overall I would say that the emerging markets. This has been the best here, we've had since I've been CEO .

Very strong double digit growth and to me I would expect that that will continue hopefully for the next decade, we're so underrepresented there relative to our overall portfolio on market share is around the world.

I would say hopefully this is the first year of many years of very strong double digit growth in those markets. We've made leadership changes we struggled with emerging markets for the first four years or so 2018 was a good year 2019 was a great year and that's the area that I think has the biggest upside in addition to maaco in both.

China and Japan.

Japan now has all the applications approved on the robot, we're still waiting for the knee application to be approved in China hoped to have that sometime this year, but those will be very very good markets for maaco as well.

Your next call comes from the line of Robbie Marcus with JP Morgan You May proceed.

Great and congrats on a really nice quarter.

Kevin maybe first I'll ask on the Capex environment, what were you seeing exiting the year with business and consumer confidence rates, So high and what do you expect going into 2020.

Maybe I'll take that question I would tell you based on our mix of capital, which runs a pretty big ranged from relatively lower ASP. It obviously much bigger ticket item the environment in a range really healthy we've seen seeing strong growth across the board for our capital businesses.

And you don't make of I would tell you. What we are seeing is while it's still a long selling cycle. We are seeing that kind of move up ahead of other capital requests in the queue with hospitals, just getting the growing demand an acceptance of robotic. So we feel really good health heading into this year in terms of the capital environment is particularly the entire.

When combined with the products that we're launching our continuing to build on on prior launches.

Great and while there were a lot of great performances in the quarter. The two Mrs versus street numbers that stood out where trauma and extremities and medical I was just wondering if you could give little more color on each of those and anything you saw in the quarter. Thanks.

Sure starting off with medical I mean, they had very very significant comparisons. If you look at last year's growth and so we're still very pleased with our medical business and that has been a consistent performer. If you go back for five years, a consistent grower at the Sage and physio acquisitions have been terrific acquisitions for that business.

So I'd say, that's more of a comp issue and we expect that to continue to be a strong performer, especially with a lot of new products coming in 2020.

Trauma extremities again, we had a very strong year last year, so little bit of that was was comp related.

And we still believe.

We have the leading market performer in trauma.

It does vary sometimes from quarter to quarter, we've seen that over the past two or three years, but the two alpha launch is starting to pick up steam. We also the mini frag launch, which just occurred at the end of this year, which is pretty exciting thats one of our sort of soft spots in our portfolio. So we believe we're well positioned and we expect to continue to grow but the market. It was a slight.

Reduction versus what we've experienced before but nothing that concerns me.

Your next call comes from the line of Raj Denhoy with Jefferies. You May proceed.

Hi, This is freon on for Raj I just have a quick question on me down. So I'm just trying to characterize the sites that are adopting make us do you find any difference and sites that might have adopted some level of computers and navigation previously, but not for robotics versus those that are mostly manual.

Yes, I don't think we have that level of granularity around it I would tell you we see across the board adoption by all types of customers that can be high volume hospitals that can be more rural hospitals. It really is wherever there is a surgeon champion and increasingly what we're seeing increased demand given how long we are.

To the launch now we're also continuing to see increase and the percent of hospitals that are now purchasing a second or additional robot.

But I can't really tie it to navigation necessarily.

Thank you.

Your next call comes from the line of BJ Kumar with Evercore ISI you May proceed.

Hey, guys. Thanks for taking my question Congrats on a nice sprint care ops. One now housekeeping question here on the guidance out below the line up you know you mentioned non interest income came in above.

Leave the assumption from fiscal 2008, Glenn is that the new run rate now we're looking at.

Somewhere in the eight to 10 million from quarter on on that that line item.

Yes that would be a let me let me go back and all in on one of our guys get back to you on that I mean, we basically we will have more borrowings coming in if you think about what we're going to do for Wright medical and so if that closes in Q3, then that will obviously change that interest number.

Gotcha, and then one on not Wright medical.

I know you one comment on the timing, but the original deal model has no impact to EPS in fiscal 20.

In 10 cents dilution in 21, just given your cash balance your free cash conversion.

Any change in your financing assumptions are on the Esa.

In a contribution assumptions here on the on the deal.

Yeah right right now it's pretty early in the guidance that we put out that you just mentioned is where we're out in terms of what we're willing to share at this point.

Your next call comes from the line of Matt Taylor with EPS you May proceed.

Hi, guys. This is the only in for Matt. Thanks for taking my question.

Maybe first on M&A.

After you addressed the last category leadership gap with right what are your thoughts on expanding into additional verticals within VETAC.

Currently ARNA and maybe just thoughts on M&A for 2020 general How's the pipeline shaping up and you've done a valuation of targets.

Yes, we continue to have a very strong pipeline, obviously with the size of the Wright medical deal, we're not going to be looking at targets of scale for the next year or two while we start to pay down that debt, but we will still keep the lights on in our business development.

Engine.

We still have significant opportunities to add to our portfolio. So when I talked about closing the last major gap. It Doesnt mean, we don't have targets within all of our meet many businesses. Each business has business development people that are focused and we continue to see attractive targets that can continue to add to our category leadership, but this was.

If you think about 567 years ago sports medicine spine and shoulder, where the areas, where we get the largest gap to category leadership and we've made huge progress in our sports medicine business, mostly organically, but also with a series of tuck in deals with K two m., we've largely addressed our spine business and.

Medical addresses upper extremities suppose the areas that we clearly we're not in the top one two or three in the category and that will propel us into that category, but if we don't really feel the need at this point to start to branch wildly outside of the three segments. These are big segments. If you think about med surge you think about neurotech in spine and orthopedics, where there are still.

No.

Very very active hunting grounds for acquisitions, but again, the target sizes will be small or at least for the next year or two while we digest. This one.

Okay. Thanks, that's very helpful and I guess, just a follow up the maaco International focus.

Really good quarter here can you maybe just talk about the opportunities internationally. So I know you highlighted Japan and China.

Maybe India longer term and maybe at a high level can you comment on utilization rates U.S. person. So you are.

No we're not gonna get into the latter part in terms of utilization rates as you saw we're seeing across the board a healthy increase and that wouldn't be just in the U.S.

But the data we have tracked for you guys. It's been the U.S. given that the largest segment if I make a revenue right now.

Let me correct, there's significant opportunity outside the U.S.

Markets like Japan, and China, Latin America, we're selling robots really around the globe obviously.

Certain markets versus others, I would say near term or probably most excited about Japan now that we have all the indications in China. Once we get the indication, but there are a lot of healthy a robot markets beyond the U.S.

Your next call comes from the line of Christian Stewart with Barclays. You May proceed.

Hi, Thanks for taking my question and congratulations on a good quarter.

Kevin I just wanted to ask kind of a big picture question to you and then I do have a follow up.

If I look at the overall organic growth rate since you've taken over it spend this really impressive linear line up into the right.

Accelerating growth really each and every year and I'm just curious on how you think about the growth profile of Stryker going forward should we continue to expect kind of nice linear acceleration story.

Going back to I guess, one of the original questions I think with bottle asked you thinking about the guidance I know you you guys tend to give kind of conservative guidance.

At the onset at a year I know you said last quarter, you still felt very strongly and you said it earlier on this momentum but should we just think about strike are continuing to have this acceleration growth profile from here or do you think that we should think about more of you being in a position test.

Staying kind of around the level of where we're at.

And then one follow up.

Thanks, Chris and obviously, you've seen our focus has been on growth we've been very acquisitive weve focused on adding and putting salesforce is wherever possible investing in R&D at a healthy rate, which feels the growth and so that's been our model and that's continuing and Wright medical this pending acquisition is another example, where.

There are very high growth business, and a very large business and so that our actual model isn't changing we continue to have the same offense and we're growing big numbers on top of big numbers and so that's what's been impressive as for four years I've been asked when is the growth going to start to slow down and it hasn't now can you take a line and draw straight.

Line Forever, probably not.

We also have to look at the market. The market has been pretty healthy weve maintained our GAAP and may be accelerated our GAAP and versus the market in growth, but we think we have an office and operating model that structured for high growth.

The way we decreased the decentralized model dedicated sales marketing R&D and business development in each division, we become a more global company and that still has significant runway in emerging markets in areas like Europe , where we didnt have high growth.

Year after year, we're growing in high single digits in Europe , which I think is rare and that's not going to end anytime soon so I think were structured to have high growth.

Putting a fine point on the actual number is difficult because you don't know what's happening in the macro environment, but I feel just as positive starting this year as I did at the beginning of last year.

That's helpful. And then I was just curious you guys need some changes I guess was last summer to just move around some of the structure reporting structure with fine and then narrowed tech as well to our part up.

Pete X and Medsurg is that something that from an R&D perspective or anything might have any implications.

On.

From a growth perspective or anything like that maybe just talk therapy, if theres anything there from off M&A, we should be thinking on that.

Sure sure that's actually just purely reflection of leadership changes.

It's really a recognition of terrific performance by gold Spencer styles and Andy peers. These are two group presidents that are just shining and so we've given them additional businesses to manage theres no change at the divisional level. So the division Presidents, who are also terrific continue to run their business that the change that we made was one level above that how we aggregate.

The divisions, but the center of gravity of our company are the divisions, that's where the action happens in terms of R&D marketing sales, so don't read anything more into that other than et cetera.

It's a management structure change to give more businesses to Andy expense to manage directly and it's a recognition of just how well they performed overtime.

Your next call comes from the line of Matt O'brien with Piper Sandler May proceed.

Hi, guys. This is I drew on for Matt. Thank you for for taking the questions I I just have but two questions here on on make light I guess I'll ask both of them.

I just want to follow up on the comment you made on the software update and it's there.

That's something that could kind of close the gap, where you're actually placing the system organically forget application that is prior to any.

And then second question as I guess it seems like you guys have been talking about needing a terabytes metlife need being a key growth drivers for.

I will get integration with maaco.

I'm, just kind of trying to gauge what your field as far as what any new end product wise, especially with a larger competitor on the market.

And then do see any headwinds or Tailwinds here as we think about 2020. Thank you.

Okay. There was a few questions in there let me let me start just with Mako and robotics in general it's still early innings within orthopedics and.

We see a huge runway ahead of us to continue to have a broad adoption of robotics Cementless has been a steady grower and we don't think thats going to slow down. It will continue it probably won't haptics step changes it will be a steady gradual progression and what we're seeing there are some new surgeons adopting cementless, but we're also.

Seeing the surgeons that started with Cementless, let's say younger healthier patients now starting to realize the benefits are so good that they're starting to put them in older patients and even patients lets say, who bone quality may not be pristine, but still adequate bone quality. So you're seeing even surgeons that are using it we used to use it on a smaller percentage of the patients.

Now seeing just how well it's performing using it on on a larger percentage of their population. So I think some atlas will can continue to run and we're pretty excited about the potential for the future that and again getting back to the technology.

This is this as many many years ahead of us and we're very excited about the potential.

Your next call comes from the line of Kayla Crum with Suntrust. You May proceed.

Hi, guys. Thanks for taking our questions answered just one on robotics and then another on trauma extremities I'm. So just to follow up on the health of the robotics business and just the strength of your order book there.

Just kind of curious if you're really even saying new competition in the market at this point and I guess more importantly, how you're contemplating competition in 2020.

We're really continuing to focus on the strategy that's been underway for five years now as it relates to total needs. We have a very concerted effort to focus selling organization, a capital salesforce and to really unique robot with smart intelligent and the ability to really get surgeons, some differentiation and we have.

Multiple indications across the joint replacement market. So our focus is on the strategy thats been working and that will continue to be the focus in 2020.

Great. Thanks, Catherine and then just early anecdotal feedback on the Wright medical deals from your sales team and then just how you're modeling the trauma and extremities business leading into the deal closure or you are you assuming there's going to be maybe dislocation leading into the deal closure or just how are you thinking about that business.

Thank you yeah, I I apologize I am I really can't get into any color. There I'd refer you back to the comments we made at the time of the acquisition. We don't on the company. There a publicly traded company. We're still competitors. So it would be inappropriate to say anything about that right. Now. We're obviously very excited about what it will do for our extremities portfolio.

But beyond that I would just refer you back to the comments that we made around assumptions tied to dis synergies at the time that galas announce.

Yes, but we still feel bullish about our own trauma business, we have new products that we're launching we have very strong brand and look the feedback we've had from our Salesforce is I would say excitement.

Really excitement that we that we're going to strengthen our position in extremities and become the really most attractive company for extremities. That's what our belief is that's what we're telling our sales force. That's what we're hearing from them. So theres always risks to deal dislocation and every sales force that we have but for the moment. It does it doesn't appear to be significant.

Your next call comes from the line of Craig fees, you with Cantor Fitzgerald you May proceed.

Good afternoon, guys. Thanks for taking the questions.

Want to ask about the overall ortho and spine markets, both seem pretty strong in the second half of of 19. So wanted to see or you guys seen any improvement in either of those broader markets and then what are your expectations for those markets in 2020.

Frankly, the market seems very stable and it's been pretty healthy for for sometime now not everybody's reported yet fourth quarter. So until we see the total numbers were not going into a clear idea, but I would say the market is maybe modestly better I think we set out at the beginning of year, we thought it would be a just a little bit better, but it's not that it's how to stay.

Change improvement it's been a good healthy market, we expect it will continue to be a good healthy market.

Got it and then just a follow up on on Maaco.

In 2020, I mean can we expect to see any clinical data or I guess, what's the plan for the release of or potential lease release of any clinical data during the year.

Yeah I'm sure you know we always do we don't always have line of sight since we're not always the sponsor of the studies, but I would expect you'll continue to key data over what timeframe or size of the studies that's harder to tell it will be another focus.

Academy meeting at the end of March. So we will again have a booth tore and we will be highlighting maaco and getting some insights around some of the new hit technology that Kevin referenced and but I would expect you're going to see continued data coming out I just don't have specific feel at this time.

Your next call comes from the line of Richard Newitter with SVB, Larry You May proceed.

Hi, Thanks for taking the questions.

Kevin maybe just the first one.

In Europe , where you are underrepresented, yeah from a market share standpoint relative to us share dominant share positions can you, maybe just tell us where you're most excited about potentially.

Using the gap even faster as you look to 2020, where do you see the biggest opportunities, especially as you move into next 12 months and where are you. Most excited there and then I had a quick follow up.

Sure I would start off at the med search segments, So endoscopy instruments and medical those areas, where we have the biggest opportunity.

For market share gains, we have terrific products and as we specialize in med surge, we do expect to have much more significant growth.

Potential there is pretty is pretty significant.

Possibly the knees, we've we've sort of underperformed and what on a market. Your standpoint, historically Mako is a big help there.

As as specialization. So that's another area that I think spine now that we have K two m.. We spent a terrific year in Europe last year, and we believe that will continue going into the future. So those are what the areas that I think we have a pretty good size hip business. We're pretty strong there are neural businesses are very strong in Europe .

So those are the areas that we still have growth potential, but maybe not as much but I would say med surge in knees spine significant runway.

Got it and maybe just a follow up on on Cementless.

Where does this category potentially get too is there a cap in your view as something that phone from penetration of what should be done cementless knees and did just remind us what your estimation for the penetration today is into the market. Thanks.

So we I think after their prepared remarks mentioned that we exited the year to just over 36% of our us knees being cementless, we are seeing adoption around the world as well not as fast as the adoption rate that we're seeing in the U.S. I don't believe it will get to hips, which is virtually all cementless just given that the new joint being away.

Bearing area and.

People, but people's bone quality, there's always going to be some more conservatism, but theres no reason to believe why won't continue to steadily rise and I think it could it could exceed 50% hard to know and hard to predict but I wouldn't be surprised at all if it exceeds 50%.

Keep in mind that we have a very unique product for for Cementless.

And that's why we're able to to have this kind of spectacular growth rate and great clinical performance.

And we'll see how that whether that applies to the rest of the market, but we certainly love our position in some analysts.

Your next call comes from the line of Larry Biegelsen with Wells Fargo. You May proceed.

Hey, guys. Thanks for taking the question what I'll make one on Japan, Katherine I think I know the answer to this but given the strength you saw in placements in Q4 and 2019 I think you placed about 220 maaco robot to from doing the math right.

Can you still grow makeup placements year over year in 2020.

Any any maybe color on how much you can grow.

As we don't model out and how many fill your targets. We have it obviously is pretty significant year over year growth, given where penetration rates are and where we are in the launch in the increasing acceptance, we feel very comfortable that you'll see healthy year over year growth.

Perfect and then.

Kevin do you guys have visibility yet on the Japan by annual price cuts and what are you guys assuming in your guidance. Thanks for taking the questions.

We don't usually provide exactly what we're assuming in our guidance. This is something that is it occurs with with regular frequency whatever we modeled if the numbers a little higher little lower we just absorbed that within our targets and Thats why we have a range.

Your next call comes from the line of Kyle Rose with Canaccord you May proceed.

Great. Thank you for taking the question UBS just to make a related ones for me there Kevin I think you kind of alluded to it at the beginning in the call, but can you maybe help us understand how you feel enabling technologies in fine I mean, obviously, you've got May go as a foundational technology there with your Nab suite, but you also acquired Cardinal Mobiuss in 2019, I guess trying to understand how we show.

Think about that in 2020.

And then just with respect to make go in Japan, you've got the full.

Indications across the portfolio is just how should we expect adoption to ramp there given you had five years in the U.S. market already and you've got clinical data and things of that sort of should should we expect an accelerated adoption in some of these new markets internationally.

Sure I'll take the first one and then I'll ask conference comment on Japan, enabling technologies to US we're big believers that this is going to be important for the future. We're very excited about mobiuss that that we launched that in our sales meeting.

And we're very excited about the potential of that being part of the enabling solution portfolio, we're not ready yet to comment on robotics for spines. We obviously have to options one with the carton, which came with the Mobiuss acquisition as well as Maaco, we are working on that on those programs, but it's just too early to give you.

An idea at one that will launch and once we have a more firm date, we will let you know, but we are believers that that is an important part of the future.

And then your your first question with specific around how we're thinking about spine in Mobiuss in 2020.

But Japan.

Just had excuse me.

You had been exciting market and we now have all three indications, which is obviously a big plus we have nine robots. There we got to nine fairly quickly. It's a market that really embraces technology and obviously, we're going to bring years of learnings on how to optimize the sale it'd be premature to tell you how big it can be but absolutely feeds into our conviction level around.

On the fact that we believe we're well positioned to gromyko year over year on robot and to continue to see significant market share gains in needs as we expand not just in the U.S. globally in general Japan. It will grow it doesn't tend to spike as fast as the U.S. Just if you look historically look at intuitive surgical look at other businesses, but but.

It will grow and we're pretty bullish about it and.

Excited for the future.

Your next call comes from the line, Steve Liffmann with Oppenheimer and company you May proceed.

Thank you Hi, guys I'm, just first question with with K two now more in the fold.

Can you provide an update on the deformity opportunity that you see a head and how that portfolio may provide an opportunity for pull through of more traditional degenerative products for you guys.

Certainly part of the rationale the time of the deal K two am our leaders in the deformity market and the opportunity there to really leverage their call point and their relationships with key opinion leaders was absolutely part of the rationale for the transaction along with the opportunity to refresh our portfolio. So that rationale was relevant.

Dan and it's still very valid today.

And obviously it took time to cross train all of our salespeople that that was part of the integration challenges that we have they are all cross trained on the catering products and you're right that pull through is a key part of wire growth will accelerate as Bob.

Great and then just secondly on on you MDR just curious on your thoughts for Stryker, specifically and obviously as an industry leader for the market. How do you see that impacting your costs pace of innovation and perhaps product discontinuations as a result of those regulations.

Yes, we you know we continue to refine and expand.

How we look at you MDR, we also have.

I've done a lot of work in terms of thinking about the value proposition that we offer in that space more and more our investors are becoming more interested in that and.

I've asked this questions about it when I was over in Europe doing fund raising in November it pretty much came up in every meeting. So it is something that we have a focus on our communications Department is working and has hired someone full time to look at it and so I think you'll see more out of us in the coming years I think what are the things Stryker did start frankly before you empty.

Our was what we call the focus on power brands.

And so we've been rationalizing our portfolio pretty significantly and that ended up being a real blessing. When MDR came about because we had already decided to move out of a lot of.

Call them peripheral SK use and so were we feel very well prepared if there has largely been legal recently been a slight reprieve on the dates free MDR, but we are all systems go ready for that we don't really believe it's going to have any meaningful change to how we innovate given that we do have this kind of power brand focused mentality around.

Innovations.

Your next call comes from the line of Josh Jennings with Cowen You May proceed.

Hi, Thanks for taking the questions Congrats again on a stellar year.

Just two quick questions on Mako first in China, I know, you're winning on the total me approval.

Maybe you can just help provide us with some color just on that opportunity any details you can give in terms of.

I guess, the Tam or number of orthopedic centers, you could address with make on China, and then secondarily in with competition coming more into play this year I.

I understand that strikes, there's not going to be standing still but what can we expect over the course. This year. This year about in terms of iterative advancements for May go total knee is there anything we could see a west Sir.

How do you how should we thinking about the the advancement of makeup total knee. Thanks a lot.

Yeah, I think I'll start with the latter at the capabilities at the functions the clinical benefits that the current any indication brinker increasingly being well established and received so that remains our focus obviously, we have things in R&D pipeline as we do with all our capital based products and looking at ways to improve but.

This is really a leading robotics technology with unique capabilities and indications across the portfolio of joint replacements.

As Kevin referenced I believe on his call and let him I'm sure. We'll talk about Academy, we do have some new hip software coming to help facilitate.

That procedure and so that'll be the focus it's really hard turning to your question about China to give you a quantifiable answer there. It's a very large market, but it's still a developing market is around building out the orthopedics, but it certainly one and once we get our knee indication approved we have a lot of excitement around but just keep in mind O U S is really an.

Number of different markets. It's it's not all tied to one or a couple of markets. We've seen great performance in Asia, and Australia in parts of Europe , and Latin America announcing Japan come online. So it's the totality of that geographic offering that I think will help really power I'll use nickel performance.

Your next call comes from the line of Ryan Zimmerman with BTI G. You May proceed.

Thanks for squeezing me in just two quick ones for me, Kevin you guys made a big push in the NT both within tell US acquisition on Air and next just curious if you kind of speak to how.

PNC business today, whether you have sufficient scale in that business and or what else you may need to do whether it's for their M&A or additional hiring to kind of scale up in that space and then the second question is just around the answer in line.

Revert to more of a mid single digit growth rate relative to the first half a year and just love to get your thoughts on kind of how we should be thinking about that line into into 2020 and beyond just given that the the cadence there. Thank you. Yeah. I think you saw we split our salesforce in surgical which is what the biggest part of our instruments Division had a incredible.

First half of the year, so little bit in the second half ever still a double digit growth for the full year instruments has consistently for the last decade been a high single digit or low double digit growth kind of business and we expect continued high growth out of our instruments franchise.

We are not lowering expectations and thinking in instruments will suddenly become a slower grower.

And frankly, if you look a lot of the acquisitions, we've done including more recently tier so three invuity.

So there's a number of acquisitions, we keep feeding the instruments machine and so you're going to expect to see continued high growth out of instruments I'm, sorry, I put the other question I think on this feeling and well we achieve yes, we have sufficient scale now and into with I mean, and tell us we already had some products within Stryker naser pour in some smaller products.

With the addition of and tell US we have what we need I would call Aaron X a tuck in or could we do other smaller additions sure just like any of our businesses. We can always do little tuck ins, but I would say, we don't need anything significant to be able to really win any intent was very pleased with the momentum that we have in that business as we exited the year.

Your next call comes from the line of Larry Coos with Raymond James You May proceed.

Okay. Thanks.

Two questions.

I guess, Catherine clearly done a sizable volume of coal needs on on May go.

2019 was a big year for you guys.

As as you start to expand into the other regions. What is what are the key benefits that you're hearing most from you or your maaco surgeons at this point, what I guess I'm really trying to understand is what is driving that continue stellar adoption of the technology.

I think it really comes down to several factors the capabilities of the nacco robot with the CTG scan that is specific to that individual patient and allows for patient specific plan that can be changed inter operatively with technology that allows.

At optimal balancing out the knee avoiding soft tissue disruption and it really helps improve outcomes, which sheen seen data that shows patients are anticipating more quickly they had less opioid use to getting out of the hospital more quickly and that ties to having a better balance knee and left tissue disruption, which is only possible with its a patient specific.

Plan that allows you to cut last because you have more knowledge specific to that patient that's really resonating with surgeons and I think thats, probably the biggest driving force.

Hi, and what is increasing utilization and adoption.

Okay, Perfect and then I guess.

The financial question here.

Yeah look you're going to have an increase in your leverage out once the rights deal is done I think you've mentioned that you peak around three times.

But that that's still actually relatively low compared to other medtech peers out there. So I guess the question is where do you wait, whereas the right level of leverage for you guys on a more steady state and even as you come up to these peak levels on.

Right acquisition can you continue to fill do M&A as you continue to move the leverage back down again.

Yes, I think the plan you know first of all as we would the we would continue to deliver 30 to 50 basis points in the underlying business.

Even once we combine right then you know honestly, we would work through the integration plan to improve the overall leverage which is obviously part of the acquisition modeling I think is that as we think about continuing acquisitions.

After we close on the acquisition are right, we would still plan to do small tuck in acquisitions, which are really the bread and butter of how we drive a lot of growth for our divisions. So I don't see any change in that piece of the strategy.

There are no further questions at this time I will now turn the conference over to Mr., Kevin local for any closing remarks.

Thank you for joining our call we look forward to sharing our Q1 results with you in April .

As a reminder, we'll be hosting a booth tour and investor meetings at A.O.S. on March 26.

Thank you.

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