Q3 2020 Stryker Corp Earnings Call
Yes, first names Conner, CEO, and our and lasting mcdaid M.C.D.A.D.
I guess, the Mavericks up anything.
It's era A.I.E.R. Ed.
I also have a phone number to begin with Enrico.
Sure two on 296 03697.
So your line, we placed on music hold into the call begins.
Thank you.
And participants will have the opportunity to ask one question and one follow up question if you'd like to ask a question. Please press Star then one on your Touchtone phone.
This conference call is being recorded for replay purposes before we begin I would like to remind you that the discussions. During this conference call will include forward looking statements factors that could cause actual results to differ materially are discussed in the company's most recent filings with the <unk>.
So the discussions will include certain non-GAAP financial measures reconciliations to the most directly comparable GAAP financial measures can be found in today's press release that is an exhibit two strikers current report on form 8-K filed today with the S. [laughter].
I'll now turn the call that word to Mr., Kevin Mobile Chairman and Chief Executive Officer, You May proceed Sir.
Welcome to strikers third quarter earnings call. Joining me today are Glenn Boehnlein Stryker CFO encrusted wells, Vice President of Investor Relations.
Today's call I'll provide opening comments, followed by Preston with some perspective on the recovery trends across our diverse businesses.
Glen will then provide additional details regarding our quarterly results before opening the call to Q1 <unk>.
I'm pleased to report that we return to growth in Q3.
Of course single organic sales growth of 3%.
This represents a rapid improvement in our business driven by a progressive return of elective procedures ongoing demand for our medical capital products and continued strong maaco performance.
In the quarter, we saw uneven growth globally that correlates to the state of the pandemic press.
Preston will speak to this in his section.
While we are pleased with the recovery of our business environment remains uncertain as flare ups a positive cobot cases are continuing.
We had many achievements in the quarter that exemplify our commitment to innovation and providing our customers with the technologies needed to serve their patients.
Beginning with Maaco, we celebrated the installation of our 1000 thrombotic system in the quarter.
I've seen tremendous success with maaco since the launch of the total knee application in 2016 and this quarter was no different.
We continue to believe that we're well positioned for sustained future success with maaco.
Our spine and trauma and extremities businesses benefited from numerous recent product launches and medical launched an exciting new acute care bed.
Our neurovascular business also achieved some new product approvals in important markets, which helped contribute to their double digit global growth in the quarter.
We maintained a many of the policies put in place at the beginning of the pandemic focused on maintaining the safety of our employees and customers and aggressively managing spending.
While sales and manufacturing approach more normal levels.
Our spending levels were unusually low given the uncertainty regarding the pace of the recovery.
Our R&D spending on an adjusted basis was 6.1% of sales.
Slightly below our expectations.
As a result of coated related execution challenges.
And some timing of spending but.
But none of this has caused any meaningful delays to new product timelines.
The combination of sales growth and suppressed spending resulted in adjusted earnings per share of $2.14 up 12% versus the prior year.
While some of our measures.
In place.
Our spending measures, we do expect some return to hiring and investments to support future growth in Q4.
Due to the continued uncertainty and lack of stability in many markets. We are not providing Q4 guidance at this time.
We saw good momentum across many of our businesses in Q3.
Although the recovery curve acceleration moderated meaningfully in August and September and has been on a similar trend so far in October.
We are proceeding with the integration efforts related.
Sure the Wright medical transaction and are working cooperatively with regulators to obtain the necessary approvals for this transaction.
This includes as previously announced the proposed divestiture of our star total ankle replacement products.
We expect to close the transaction in November.
Please note beyond this update we will not be taking any questions regarding Wright medical on today's call.
Finally, I would like to thank our employees for continuing to serve our customers and finding ways to succeed during such challenging times.
From our sales and service personnel in the field every day with our customers to the marketing and R&D teams that are finding creative ways.
To connect globally to advance new innovations to our manufacturing team has an office staff, who ensured the continuity of our business.
We are living our mission statement, which is together with our customers we are driven to make health care better.
And now over to Chris.
Thanks, Kevin.
Today, My comments will focus on providing additional thoughts on the current environment and the recovery of collection businesses and geographies during the third quarter.
We have generally seen a V shaped recovery during the second quarter, we continued momentum and growth in the third quarter, although at a more moderated level of month over month improvement.
The sales growth and improved performance in the third quarter was driven by three main factors continued acceleration of elective procedures strong demand for many of our large capital products and the return of our more event driven businesses like trauma and stroke.
Small capital products, including our video cameras and power tools showed nice improvement, but lagged other products in their recovery. These products generally trail elective procedure volumes by a few months.
Despite a resurgence in infection rates globally, we saw sales growth in most developed markets led by strong recovery in the United States, Australia, Germany, and Canada. These markets, we're operating around three seven levels throughout the quarter.
Our China business to return to double digit growth in the quarter with procedures returning to more normal levels. Despite the government, taking a more aggressive approach to lockdowns around co infection.
The UK, India in parts of our Latin American businesses continue to lag as they work through heightened impacts of the pandemic.
Procedural areas that were deferred or soft during the second quarter showed significant improvement in the quarter, our knee spine trauma and extremities in sports medicine businesses, all achieved year over year growth. Since also showed significant improvement in the quarter, reaching prior year levels. Each of these businesses benefited from the accelerate.
And on elective procedures during the quarter that was fueled by the addition of new patients and the recovery of previously deferred backlog.
Surgeons in health care providers continue to work through the new and existing backlog by adding incremental procedures to their normal schedules with.
With the continued variability of infection rates, we believe the hospitals are better prepared to ensure that these types of elective procedures can still be performed at some level. Unlike the dramatic drop that we saw in April.
However, the situation remains fluid and procedural impact and recovery will continue to vary across geographies does.
Demand for our large capital products drove strong growth in the quarter, including ongoing high demand for our Mako robotic technology.
In the third quarter, we were very pleased with the acceleration of maaco installations, both within the U.S. and in markets outside the U.S., where we continue to expand our makeup credits.
Recently, Brazil approved for use of our makos robotic technology for both hip and knee procedures.
We are also experiencing increased utilization with a growing percentage of hip and knee surgeries being performed with a make a robot.
Within our medical Division, we saw strength in our emergency care business, along with continued high demand for our beds and stretchers, demonstrating the improved financial stability of our customers' aided by government subsidies like the cares act and the resurgence of positive cash flow driven by the continuation of elective procedures.
As a result, our order book remains robust for both maaco and many of our medical products. The launch of the new acute care bed procurement. He is a contributor to that order book and a demonstration of our ongoing commitment to innovation during the pandemic.
With our specialized business units category, leading product portfolio and innovative technologies, we are well positioned to continue our above market med tech growth with that I will now turn the call over to Glen.
Thanks Brendan.
Today I will focus my comments on our third quarter financial results and related drivers our detailed financial results have been provided in todays press release.
Our organic sales growth was 3.3% in the quarter. These results included growth in the use of 3.5% and international growth of 2.8%.
As a reminder, the quarter included the same number of selling days as Q3 2019 price.
Pricing in the quarter was unfavorable 1.4%.
From the prior year quarter, while foreign currency had a favorable 0.4% impact on sales during the quarter, we returned to growth as demand for our procedural based products came back strongly in most key geographies and demand for large capital, primarily maaco and medical beds remains strong.
Our adjusted quarterly EPS of $2.14 represents growth of 12% from the prior year quarter, the foreign currency impact on the third quarter EPS was accretive by one cents.
The strong EPS growth was mainly driven by sales drop through favorable sales mix disciplined cost control and better than expected gross margin leverage as our manufacturing output return to more normal production levels.
I will now provide some brief comments on our segment sales.
Orthopedics at constant currency inorganic growth of 3.8%.
This included us growth of 7.5%.
We saw growth across knees, hips trauma, extremities, and maaco, which grew 30.2% in the quarter.
Additionally, all these products are growing off strong U.S. comparables from Q3 2019.
Internationally orthopedics had an organic decline of 4.7%, which reflects the slower recovery of elective procedures in Europe. As a result of co bid restrictions, partially offset by a positive maaco performance.
Medsurg had constant currency growth of 2.9% and organic growth of 2.5%, which included organic growth of 1.4% in the U.S.
Instruments had U.S. organic sales growth of 1.9%.
Collecting increased demand for our safety related products, including waste management and smoke evacuation products, the latter which had double digit growth.
Endoscopy at U.S. organic sales growth of 1%.
This reflects a return to growth primarily driven by our sports medicine business, where we had double digit growth. This.
This was partially offset by moderate declines in core endoscopy and communications businesses.
The medical Division had us organic growth of 3%, resulting from strong demand across its bed business growing double digits and emerging emergency care business growing high single digits. These were partially offset by a decline in our sage business.
Internationally Medsurg had organic sales of 6.7%, reflecting very strong demand for medical products combined with positive performances across most of our med search product categories in all major geographies.
Neurotechnology and spine had a constant currency growth of 5.5% inorganic growth of 4.3%.
Our us neurotech business posted constant currency growth of 3.1%, including 1.7% organic growth for the quarter.
Overall this reflects positive performances in our spine CMS and neurovascular businesses and included double digit growth in our ski mic products.
Internationally, Neurotechnology and spine had organic growth of 9.8%, including double digit performances in our hemorrhagic and excuse mic products and a very strong performance in our spine business.
Now I will discuss our operating metrics in the quarter.
Our adjusted gross margin of 65.9% was favorable 20 basis points from the prior year quarter compared.
Compared to the prior year quarter gross margin was favorably impacted by volume and business mix, which.
Which was partially offset by price and some unabsorbed fixed costs although.
Although our manufacturing output returned to more normalized levels during the quarter. There was a somewhat negative impact related to our idled manufacturing lines at the beginning of the quarter.
Adjusted R&D spending was 6.1% of sales.
Our adjusted EPS DNA was 31.7% of sales, which was 210 basis points favorable to the prior year quarter.
Compared to the prior year quarter SDMA was favorably impacted by operating expense savings.
Actions enacted in March which continued in the third quarter.
In summary for the quarter, our adjusted operating margin was 28% of sales.
All of the spend control measures that were enacted in March continued through Q3.
These measures covered most of our discretionary spending including curtailments in hiring travel meetings and outside consultants.
As our businesses continue to ramp back to more normalized levels. We do anticipate that there will be increases in hiring discretionary expenses and other costs that support future growth and business expansion.
Related to other income and expense compared to the prior year quarter. We saw a decline in investment income earned on deposits and an increase in interest expense related to additional debt outstanding.
Our third quarter had an adjusted effective tax rate of 16.1%.
Turning to cash flow and liquidity, we ended the third quarter with cash and marketable securities of $7.2 billion, which includes $5 billion of funds related to the write medical acquisition.
We also generated approximately $830 million of cash from operations in the quarter, which was again ahead of our internal targets.
This strong operating cash flow reflects strong net earnings and a reduction in core worker working capital versus the prior year.
The actions that were implemented in the first quarter to conserve cash continued in Q3, which included discretionary spending controls reductions and planned capital expenditures and project spending.
Focusing on opportunities and accounts payable and slowing our M&A activities.
As it relates to guidance for Q4, and the full year, we reaffirm our previously announced decision to withdraw guidance given the continued significance of uncertainties at this time.
And now I will open up the call for Q and a.
Thank you we will now begin the question and answer session. If you have a question press star one on your telephone keypad. If you wish to me if you remove Subq press the pound key as a reminder, callers will be limited to one question and one follow up question.
First question comes from Vijay Kumar with Evercore ISI.
Hey, Jay we can't hear you.
BJ are you on mute.
No I'm sorry.
Okay, guys can you hear me personally or downtown kit.
Thanks, Kathy well congrats on a really strong friendship, Kevin So got and I guess I'm looking at these numbers here some of your peers and core or the other.
They are seeing low single digit declines you guys are seeing a positive declines maybe parse out what.
What is the underlying market versus off this up in a constant theme of Stryker gaining share.
Is that what's happening what's driving this trend here.
And perhaps also touch upon trends you're seeing Karen cover any reason I saw that we didn't have a Q4 guidance, but perhaps up in a sequential trends what were seeing here. In Q4 is there any reason to believe that Q4 trends should be perhaps.
Perhaps up.
Different from what we saw in Threeq you.
So thanks BJ, we're we're pretty excited about the performance in our business. It's not a one quarter thing I think you've seen our joint replacement division, which includes hips knees and make lots and performing well for some time and that momentum is continuing I mentioned in my opening remarks that we're pleased with October it's going well so far in the month.
But I really don't want to speculate on November December just given all the flare ups that are occurring.
Assuming that the market stays fairly stable, we have we're going to have a good core quarter, but but thats a big assumption. Given this is obviously a once in a lifetime type of pandemic. So I don't want to get ahead of myself, but we were feeling good about the business through the month of October.
Gotcha, and then maybe one on the capital side you guys had mentioned the strong order book for National large cash warm up.
I know you guys just launching new bed, perhaps just talk about the visibility you have on the capital side of the business.
And in.
Is that is that a confident in south.
You can perhaps extrapolate into next year or this up perhaps Q4, and then we'll see how the market shakes out for next year.
Hey, Jay precedent to this just to expand on that a little bit I mean, we do continue to have confidence in our in our capital business I think as I mentioned in my prepared remarks, as you look at our large capital business and demand that we saw on May go in on the medical business in particular, we feel really really good about that small small capital as we.
We've talked about in the remarks as well, we expect that to continue to come along that recovery curve as well, although it has shown that improvement, but lagged a little bit some of the other other products in terms of that recovery and I think overall, we feel good about it we feel good about where where orders have come in we feel good about where our customers are in turn.
Because of their financial stability at this point in time, certainly compared to where it was a quarter ago and.
And because of those items, we feel confident in where our capital business is headed I think all of that is under sword as Kevin said by the uncertainty that still remains.
With regards to fit flare ups in how the virus continues to to kind of move through different regions.
Next question comes from Robbie Marcus with Jpmorgan.
Oh, great. Thanks for taking the question and again, congrats on a much better than expected quarter.
Kevin how should we think about.
Interpreting the comments.
On a go forward basis and in respect to how much of a backlog is work through or there's still patients who deferred procedure is that still needs to get into queue here and because it sounds like July was probably the best quarter after quarter would fourth quarter, if current trends hold be similar.
Better or worse than third quarter here.
Hey, Robby threatened so so I would say in general it's hard to predict exact percentages with regards to how much of the backlog has has been work through versus what our new new patients that are coming into that funnel based on the feedback that we've gotten we know that surgeons are continuing to work through that backlog and that they are also adding.
In patients. So it's definitely a mix of the two we also know that there are some patients that that are still waiting things idea is to get their procedures done, but all in all clinics in surgeons remain busy and they're continuing to look to add additional shifts or a different additional opportunities to add surgery or even a shift to the outpatient setting.
Our expectation is that that trend will continue again barring any major disruptions from a corporate perspective.
Got it and maybe just a quick follow up once again you had another great.
Maaco quarter here I, even in the tough times of coated and I was wondering if you could speak to how willing are you at hospital systems are to go out still in and by the large cap at all considering it seems like your main competitor in on robotics has shifted strategy to place a lot more units rather.
Great then recognize revenue upfront it appears you're still able to recognize a healthy amount. So just wondering what the environment is like in and if you're seeing them on the competitive side. Thanks.
Yeah look we continue to feel very bullish about maaco I think in Q4, we're going to have a unless something bizarre happens in the marketplace. It will be a record quarter in Q4, because the order book is still very strong.
With over 1000 that we've kind of hit an inflection point and robotics. The interest in robotics is is increasing every day.
Teaching hospitals are adopting robotics and are feeling the pressure to have robotics as part of their programs and in some cases, they have been holding off a little bit so for us. The the momentum is palpable, it's continuing its strong and its even starting to pick up in other markets, such as Japan and countries in Europe, and they did a little bit of a pause in.
Second quarter, we saw them coming back frankly in the third quarter. So.
The outlook for makers continues to be very bullish and you know that she really irrespective of competition. This is sort of a market trend with its changing the market shifting and we really love the offering that we have in this in this category.
Next question, we have is David Lewis with Morgan Stanley.
Questions.
Kevin I Wonder if we could just talk of maybe 2021, if we can't get.
Yes, he had a specific numbers either relative to 2019 baseline or maybe some topline qualitative commentary about how you're sort of seeing the top and bottom line for 2021 or specific product launches in innovation pipeline, we should be thinking about for 2021 and I had a quick follow up.
Yeah, David we're not going to really get into sort of guidance for 21, you know we do that in December January and.
Right now we're planning to provide that in January I think we've gotten good momentum across a lot of our business as you saw the trauma number we post a really strong number they've launched a number of new products and feeling very good about that and that's frankly before right.
Right medical kicks in.
So we're really excited about the momentum we're going to see across trauma and extremities next year, our neurovascular would be one I'd point to that I'm really excited about we have this for possible second nexgen.
I'm quoting stent approved in the United States and that had very good growth, even though even though we're we're still having to go through the pains of pottery within the limits of the pandemic. So I'll admittedly from a small base, but thats going to pick up steam next year.
As well our aspiration offerings with the neurovascular, So neurovascular I feel very good as I look through into next year and and of course maker will continue its positive trajectory that affects.
Not just the nickel business, but of course hips and knees and so those are all going well instruments continues to be a really strong business for us with smoke evacuation will see is now becoming a standard in many areas. All safety push I think will continue beyond frankly, the pandemic and Weve really established a really great stable of products.
Related to safety. So a lot of Tailwinds I think that'll continue on a sort of underlying basis. The big unknown is sort of how this pandemic evolve and its still going to be with us obviously through the first half of next year in some way shape or form.
So that's the that's the big unknown, but but a lot of the businesses that we have we're feeling.
Good about the momentum the product cadence and new products, which I've already touched on some of them are.
We think will position us well for 2021.
Okay, very very helpful and the one business I wanted to highlight wishes spine, obviously that's been a.
Sore point these last several quarters in your some of your performance frankly was better than some of the emerging mid cap spine players just.
Just what you're seeing in spine and have we finally turned the corner from integration perspective are you seeing more traction on sort of rep hiring but it was a surprisingly strong quarter for you in spine just curious the underlying drivers. Thank you.
We are really pleased with the performance in spine I think the kitchen, which was obviously a tough integration we knew would be tough it was tough we.
We feel that that's largely behind us.
I think we actually got a little bit of reprieve in the second quarter honestly to sort of get our inventory and get our position more stabilized.
Oh, yes, it's been strong frankly from the beginning part of getting that U.S. business on a better putting we feel very good about that they launched some new products, including Niagara, which has a lateral access product.
Corpectomy cage, and so getting back to launching products, which as you know is a big part of the K two m. offerings.
Excited that we're there now back to launching new products versus sort of dealing with all of the integration challenges as it relates to salesforce very stable.
Second we're actually having sales reps wanting to come to join Stryker now in spine. So we really do feel the tightest starting to shift in spine and it was definitely a very good quarter.
Okay.
Next question comes from Bob Hopkins with Bank of America.
Hey, Thanks, and good afternoon.
Just first question I wanted to ask Kevin about your hip growth in the quarter and then just hit generally your if growth in the quarter was maybe a smidge below peers. So just wanted to talk about or asking about dynamics, there, but probably more importantly also wanted to get your view on your pipeline in hips and when you've got new launches coming.
Because I think in previous conversations as you know we talked about some some exciting launches potentially in that area.
Yeah. Thanks, Bob we're actually very pleased with our performance we had good growth in hips, and we had a very tough comp from the prior prior year quarter, where we outperformed the market in hip. So overall, yes competitors did well and if we don't we also did well in hips as you know its or a little less deferrable, the knees, which really speaks to the strength we had it in knees.
But as it relates to hips, we're very excited about two aspects of all the pipeline. The first is the on Mako, we have a new software upgrade for hips that we launched in the second quarter because of the pandemic, we haven't really been able to roll that out fully.
I'll get fully rolled out probably by the end of Q4, so it's a progressive rollout, but really we'll have more of an impact next year in the second part of the pipeline is a new stem that we have planned sometime in the middle of next year I will get more specific around timing maybe in the January call, but thats going to be an exciting stem, which has some features that.
Surgeons like it and a little bit of a gap in our portfolio if.
But overall still pretty good quarter, yeah. Yeah. Okay. Thank you and then also wanted to ask you a little bit about the potential for durability of growth in the medical division and Im not asking about fourth quarter I'm thinking a little bit more longer term because there are a lot of moving pieces in that division right now it sounds like you know siege might be struggling a little bit, but then oh U.S. strength has been enormous your.
Launching a new bed and then there's the core underlying bed market, maybe just talk about your thoughts on the durability of of the growth outlook for that business.
In light of all the moving pieces.
Hey, Bob a question I think as I've mentioned before specifically on the capital side, we feel very confident where we're heading.
In terms of the durability on the on that business, particularly as we think about things like that than structures with the launch of the new bed.
Adding to that portfolio very very excited about what that's going to bring in new for us CHC sales had a had a slower a slower quarter in terms of its growth obviously, an improvement from the second quarter, but feel a little bit of a decline versus prior year given that business in terms of stocking into purchase.
Michael We really do you expect that business has turned the corner as well as we go into the.
The next quarter and into 2021, so I think we'll see some positive dynamics from that business and then overall, obviously, we've seen some impact from the pandemic and we would expect that we will continue to see momentum on our businesses as we go as we go forward specifically as it relates to the U.S. business. As you noted we had very strong.
On Q3 performance really across both emergency care and our acute care business is I think it's important to note that we were really having good performances in the L.U.S. face, even before really the impact and pandemic and our expectation would be that even though while we're seeing some some benefit certainly from the pandemic that we'll continue to build on the momentum.
And then it started even before that as we go forward. So I think all in all feeling very good about the future from a medical standpoint.
Next question comes like that.
Just like that one comment on the other part of the Physio business has called public access so thats outside of the emergency in the hospitals and that business really got very very quiet in the second quarter came to a halt almost and so that'll come back that will probably be a little slower maybe more in the first quarter second quarter of next year. So sage will.
Come back a little little bit sooner, maybe towards the end of the year and then public access will come back.
Maybe in the first or second quarter next year. So there are parts of the business that are drags right now.
I'll turn positive and now of course, some pops that recall from the pandemic that will start to start to moderate but we love our medical business. We love. The leadership, we have in that business and they will continue to be a really good performer for us.
Next question comes from Matt Miksic with credit Suisse.
Thanks, so much for taking the question.
Kevin I just had a follow up on.
This action strategy had been pursuing and talking about it a little bit I know you don't want to tip. Your hand to do too much as to exactly how that all is going to work but.
We love to get any anything you are willing to share progress so far how it complements the or other.
Efforts to grow and maybe how it complements your relationships with some of the knowledge merger networks, which have you know an outpatient channel often and I have one follow up.
Yes look I'm not going to get into too many details about how we're doing it but we are very pleased with our performance.
Sees.
To make a number in the third quarter Nancy's with the highest number we've had so far in assay. So makos part of the solution, we had double digit growth in our sports medicine business and of course that that plays in the assay, primarily and so those are the proxies that you could use to figure out sort of how we're doing in the FCC is look at our sports med business.
Look at the growth that we're having with maaco theres a lot of other products that we have that play very well in the surgery Center market.
And we just we just basically created that aligned offerings that aligns our divisions.
You know in the hospital, we tend to operate very separately and we go in by product category, we're not doing that in the S.C. and this aligned offices is really working very well I don't want to get credit So Eddie Pearson the entire team that sort of established this this office.
Thats working ahead of what I was expecting and feel very bullish about going forth.
Through thick and then just follow up on you mentioned strength and growth in China. Despite some of the some of the.
Pandemic controls are putting back into effect, there and if you've mentioned last call on the call before just about the move into China with May go going forward and.
Understanding that I'm guessing that a lot of that early activity is in the sort of premium so a market and.
Maybe to any any update or progress as to how that's going and.
You know any any early results that you've seen in terms of feedback or uptake.
Sure. Thanks, Matt So let me start with Mako. So we only have the hip approved right now in China. We don't have yet have totally we hope to get that in the first or second quarter next year, it's taking longer than than we had expected, but we're on track so well get it eventually approved but we are quick we are getting sales and they go for hip.
But of course once you get the knee on the on the robots and of course, the sales will start to really accelerate it there's just going to general pickup in general so the pandemic they've done a good job controlling.
In the country, we've seen a pickup both in our Trason business, which is our lower priced products as well as in the premium segment. So it's kind of I would say across the board pickup that's occurring in really related to into the corner virus and we had a great year last year in China.
Our best here are on record in activity or the year before we have a strong management team both on the transmission side and in the premium segment as you know thats been a more recent thing for Stryker. So I would expect that we will continue to see that kind of performance since the market conditions at the pool improved markedly.
Your next question comes from the line of Larry Biegelsen Wells Fargo. You May proceed.
Hi, good afternoon, thanks for taking the question.
So Kevin I'm on the operating margin in Q3, it obviously stood out the 260 basis points or so improvement year over year and I heard the comments that some of it was spending that you deferred because of the pandemic, but my question is how much of this may be durable because of things.
As you've learned.
To do more efficiently during the pandemic and how does it make you feel about the 30 to 50.
Basis points of operating margin improvement on an annual basis that you've you've targeted.
Yeah, Hi, Larry this is Glenn.
You're right during Q2 and Q3, we obviously continued a lot of the cost containment measures that we had enacted in March and these were you know kind of things that other companies probably have looked at travel meetings training consulting and just the real whole gamut of discretionary spending was really.
Kind of locked down.
We also slowed our hiring we slowed project spending on sort of non R&D type projects.
I'd say coming out of this year, you're absolutely right. We have learned sort of new ways to work, where we're doing this call virtually in it and it seems to be working fine.
We also have.
Have launched virtual training with customers and also internally that has worked very well and so I would say some of that very definitely will carry over to the future in terms of how we sort of emerge from the pandemic and what our operating structure looks like.
That being said, though as we get back to more normalized operations.
Sure that we we didn't know the recovery what happened with quite this quickly uhm. So we're pleased with that we do have our M and a team is back up and running because of the right medical and the debt that were that were taking on because of that we don't expect to be doing a very large deals and then in the next year or so.
Uhm, but you can look for more tucking deals, but we do want to stay busy with M&A, we send that to the rating agencies. Our teams are actively looking at targets that they sort of never really stopped they did just slow down a little bit.
While we saw sort of.
Pace of recovery, but you should expect us to get back to our normal kind of tuck in offense, which will complement the right medical acquisition.
X question comes from Matthew O'brien with papers Sandler you May proceed.
Good afternoon. This is Patrick on from that thank you so much for taking our questions I Wanna start with Mako now you've done a really nice job with placing make out in the underlying demand as really strong, but I'm curious if you could give us more color on the sales cycle, specifically I'm wondering if there's a chance that the sales cycle kind of over the longer term.
Remains elongated as some of these hospitals work through financial pressure. So any color you have there would be really helpful. And then I have a quick follow up.
Yeah sure I can just answer that no. We don't expect that that sounds like hoping to elongate a matter of fact, it's going to include that we've seen over the last couple of quarters is we've actually been able to get out and drive may go even faster and so there's still quite a bit of a runway as we think about opportunities for make us. So we don't expect that that <unk>.
Go to a movie.
Great. That's really helpful color and briefly I know this might be kind of a long longer way out higher level, but I'm. Just curious if there's any changes to the way you guys are thinking about the robotic offering an spine either through you know a mako platformer. The moebius asset I'm, just kind of curious about how you're thinking about that pipeline as the spine business really picks up momentum.
<unk> starts heading in the right direction, thanks for taking the questions.
Yeah. Thanks, you know, we're really not ready yet to publicly talk about what the robotic offering is it will be in Portsmouth correspond business no question.
Moebius did come with a work with a robotic uhm pipeline product once we're ready what will sure. We're work we're actively working on an offering for just not quite ready to sure what that will be and what the time line is but state too.
X question comes from Ryan Zimmerman with B T. I G. You May proceed.
Thank you I appreciate you taking the questions. Congrats on the corner, Kevin you you called out saves performance being maybe a little weaker than expected <unk> was that a reflection of procedural volume or is there anything from a protocol perspective in terms of preoperative sterilization that may have changed for some customers given the pendant yeah look I.
I'll tell you first of all we weren't surprised by the sales there wasn't weaker than expected. It was certainly negative sales growth. In fact, it was just <unk> everything we had was a little better than expected in terms of the pace of recovery that the nature of the sales cycle Force age you need to have a lot of activity in the hospital for your procedure is being done with the products are being used because they're consumed as you.
Have people in the I C U that people that are getting procedures done.
And so the census in the hospital was lower notes in the second quarter for sure and certainly even in the third quarter <unk>.
And debate these products are bought in bulk and they're put on the shelf because they're concerned daily. So you have this sales cycle that that's it sort of has to be depleted the inventories have to be completed before the re ordered so that's not at all a surprise that the fact that the the the sales were negative it just sort of explains why that that was a dragon.
The U S on our medical business, we we don't have a great big stage business outside the U S. It's more of a U S phenomenon.
But but we loved the products in fact, we launched a new product sulfur sulfur oral care product, which is really exciting and I missed the the pandemic, which is getting great customer feedback but of course, that's just gonna take time for that to be ordered and then and then put on the shelf. So once the ordering once that usage starts to to happen in the inventory start to put.
We'd down we're gonna get sort of <unk> of reordering.
Again that may not occur fully in the fourth quarter, but towards towards the end of the fourth quarter and into the first quarter real expensive, except page to get back to its normal very strong growth.
Okay, and then just as a follow up one on make not not so much on the on the unit volumes. Although it was certainly encourage it but I I think there was a software upgrade cycle earlier in the year I could be wrong on that I. It certainly called off the hip software upgrade, but but how should we think about you know the the upgrade cycle for.
A software of Mako in the installed base and what that can do for growth maybe over the next 12 to 24 months within within your existing customer base.
Yeah. It looks software upgrades are important they just help with the.
Use abuse and really productivity for the surgeon, we did a software upgrade on hips and the second quarter. We are working on one for news as well the hip one had some very important that it wasn't just a software upgraded that had use it used to do with registration, which is one of the frustration points, perhaps but it also provides new information to the surgical on.
Surgeon on pelvic tilt, which they're finding really beneficial so I do expect it will cause it was already increasing the use of mako for hips, but that'll probably accelerate into next year, but that's all for upgrade is still being deployed in the field and and will share more about the new software upgrade when when that happens as well. So <unk>. This is not new we constant.
<unk> look to provide better usability and usage factors for surgeons and that's that's a common thing, but I wouldn't call that an inflection point. It's just continued good customer experience, which we'd like to have it put them at all with all our products T. A real boon is just the that the adoption of Mako the.
Success surgeons are having to assist the hospitals purchasing their second and third and fourth makos I'll take the growth in teaching hospital the growth in surgery centers that there's just it's just kind of an inflection point that we're seeing that I think will will continue to last for for many quarters.
X question comes from Joanne Winch with C D Bank.
Good evening and very nice corner two questions. The first one is make a related there's a lot of this call. So I'll throw my name can you give us an idea of what percentages percentage of hospital currently have a robot and where do you think that ultimately <unk> and instead of a.
Two part question because when we do our survey work I talk to hospital administrator is on physicians that have 123, they they they seemed to not be able to get enough robots enough type of robots I'd love your instead of you're on the landscape and then really the second question has to do with seasonality is there anything happening in the big broad world outside of the pain.
Donna pandemic that you think will impact the fourth quarter. Thanks.
Okay. Thanks, Joanne So look the first question, it's really just about when you're in a new market adoption. It it's not easy to predict right. How far will it go you know could robotics become standard of care as we've seen happen in some other procedure areas, maybe and if it becomes standard of care you can do the math of how many hospitals do robotics.
Procedures in surgery centers that are being added that do robotic procedures. There's there's a huge number of robots still to be sold and so that's that's the underlying question is will it become the standard of care, that's expected and all procedures and for obviously striving for that.
And the industry's moving in this direction the pace of the Curtis really hard to predict but your points right and and what we're seeing is you know we <unk>, we always like to have certain champions with every robot that we sell so.
So we don't do mass sales of robots, we don't to see sweet sales of robots without searching champions. That's just not the way we operate and so what happens is the robots that we do sell get used right away and when they're used the surgeon chairs that are experienced and the surgeon my orange with the other orthopedic surgeons.
And then they want to watch this procedure they get interested and then they'd like to use it and then what happens is the robots fully booked.
<unk>, that's searching gets frustrated and then goes to their administer instance, I'd like a robot for for for my procedures. That's a dynamic that we've seen happen over and over again and and that will continue. So at this point you know how many hospitals there are that do the procedures. It's a large number and we we think that there was a long long runway we're still in the early stages.
Robotic adoption.
<unk> repeat it procedures, sorry, I lost it goes the second question I can try and do you mind repeating.
Second question, how to do more with seasonality I can't we have a P. I N number yeah. So so there you got yeah, sorry, yeah on the seasonality question. You know Q4 is is normally our <unk>, our strongest seasonally quarter, though that we have.
And so November December it's it's really hard to predict this year you will receive the same check of seasonal impacts.
The surgeons are saying, they're still wanna be busy hospitals them to realize the importance of electric procedures to their own profitability.
And so will we see the normal push I don't know like you know the searches we talked to seem to think that they're gonna be busy but.
It's <unk>, it's a it's a question I can't answer because we really we've never been through this with a pandemic, but right now we're not seeing any signs of you know if something changing it seems like there's a normal dynamic outside of the pandemic. So as long as surgeons can go to operate they're gonna operate and they've become very creative in terms of figuring out how to do their cleaning protocols there.
They're actually very efficient some some hospitals are opening longer hours or even opening up on on a friday or on the weekends to stay busy. So we'll have to watch it closely but but I I really don't have any new insights to provide I don't I don't expect something different but from what we've seen in the past.
Next question comes from Josh Jennings with Cohen, Let me proceed.
Good evening. Thanks, Thanks for taking the questions congratulations on a strong recovery.
I wanted to ask future make make some indication question or you're not giving timelines, but just thinking about the development of the shoulder indication.
Should we be thinking about the development there being exclusive for right medical <unk>, Yeah, right medical up extremely portfolio and does just to push out of that.
Acquisition do anything to the timeline of making sure authentication.
No, we're not really gonna get into the timeline, we believe that the robotic around Fox for shoulder is going to be compelling.
Shoulder is it very difficult procedure to do as sort of more akin to partially than it is to totally or total hips and we believe it's going to be very very compelling. We're excited about the progress that our team has made on the application and.
We're not gonna talk yet about we'd implants, you're gonna be married with the robot, but we will be sharing that at a later date.
Okay understood. It's follow up a a started ankle divestiture just thinking about the extra striker extremities portfolio are there any other divestitures that need to occur before the clothes or the deal and I'm. Just wondering if you could help us with that so as we as we think about forecasting out in in <unk>.
21, and making sure we account for any any other divestitures outside of the star. Thanks, a lot for taking the questions guys.
Yeah no problem. So as we talk about we're not really gonna get into too too much more in terms of the right medical offering Kevin mentioned the divestiture. It's our we believe that that were on past with the regulatory agencies to to close the deal in November and so let's leave it at that.
Next question comes from Calix room, what service you May proceed.
Hi, This is Sam on for Kayla, Thanks for taking my question.
First of all I just wanted to ask about the arrow system <unk>.
<unk>.
Curious how you describe about a year and now how how that's performing and then generally how the captain of capital market for imaging versus say the stripes and robots is.
Performing and then any an impact you're seeing on closer to other businesses from from that system.
Yeah listen we were thrilled with the movie to talk with a sure we bought a terrific technology. Our biggest challenge honestly. It has been scaling up with a matter of factory. So we've had very very high demand for moebius. It was a small company based in Shirley, Massachusetts.
We're just Lar challenge is really Scaleup and it's the same challenge we've had frankly with T. S. O three which is sterilizing company that we bought in a lot of times when we buy smaller companies. The the demand tends to overwhelm us and we have to.
You know go back to the design robustness and be able to scale of manufacturing build new production lines and so that's a high class problem I would call. It we were really really pleased with the with the arrow product it performs extremely well <unk>.
Frankly had an increase in demand in some cases they were using it to look to to do imaging for for Covid and so we've been frankly struggling to keep pace, but it's like I say, a high class probably really excited about the I'll shop, good products and their pipeline as well so.
So it's a deal that old <unk> very much help with her spine business for the longterm.
But we're still in the scale of place.
Okay. Thanks, and then just with resuming more stand on unwrap hiring into the fourth quarter, if you've maybe <unk> that out a little bit to me how should we think about that in terms of more returned to normal that firing or are you thinking about maybe pressing your strengths a little bit and getting a little more aggressive muscling competitors made me struggle.
Thank you.
Yeah, Yeah. That's a good question Sam you know I think I think is the divisions look out towards 2021, and they're planning sort of their their budgets and where they can get to it. It always will include new rep hiring.
And so and absolutely a regular cycle is that we would get started on that and cute for so I think that you know most divisions are planning to expand their rep sales forces towards the end of the queue for and certainly on the end of January Uhm of next year and that would be just part of the sort of.
The General territory management that we go to every single beer.
Next question comes from Matt Taylor with you B S. Please go ahead.
Hi, Thank you for taking the question. The first one I had I wanted to follow up on your comments on your bed launched in a bad market and I had kind of a two part question it.
Really trying to understand if you're seeing a trend towards the bed market expanding and that could create more opportunity for ya.
I was just hoping that you could comment on how this new rollout could go you expect it to go into your own base and do mostly conversion of your older beds or do you think there's a share game opportunity.
Yeah. So in terms of of the bed market itself I think there's probably a bit of both right. So there's there's obviously you're gonna be the replacement cycle beds. It's gonna continue to happen, but I think the pandemic is also created some opportunity for expansion in that market as well. So I think there's gonna be a mix of both of those items as we.
Go forward with regards to security and and what that's gonna do for US. It again feel really strongly about that bad in the in the opportunity and there'll be some opportunity like I said, both in terms of a replacement cycles that'll that'll fit into and then expanding into competitive opportunities as well.
And could I just ask the follow up I was really interested in your comments about standard of care robotics of Mako and I think we've seen that the knee value proposition is very strong.
Was wondering if you also think that you can convert that to be the standard of care for hips over time in other areas that your vision that it'll be standard and in many areas or more more siloed.
Yeah, no the vision as a <unk> for it to be standard of care everywhere, where we have an application now I think it'll take longer you've seen the adoption of hips has trailed means with the adoption partial neighbors very very strong I think the adoption his shoulder will be very very strong.
Knees will continue and then I think hips eventually just it's just gonna take a little longer because frankly, the satisfaction level of patience with hips has been quite good relative to me so relative to shoulder and I think over time total ankles. There's there's many other areas several box will play and and that's our expectation is that that there will be.
<unk> standard of care just a question of how long will that take and in what iterations are required for us to get there.
Next question comes from Richard New richer with S. P. B. Please proceed.
Hi, This is Jamie on for rats. Thanks for taking my questions I guess and the first one I wanted to ask you guys didn't call. That's been strengthened smoke evacuation product line I wanted to make sure I heard you correctly did you say that that grew double-date as in the corner and then just kind of and digging into that a little bit what's really driving the strength and that.
Product category is it something that you really starting to see pick up now kind of just in a wakeup covid.
Sure on the the smoke evacuation yeah, I did reference that we had double digit growth in that product line and you know uhm honestly, even before covid, most hospitals and caregivers have been very focused on safety and smoke of act lines up.
Extremely well with that safety focus I think with Covid. It's it's just sort of even more emphasized in terms of what that product does to the environment that they operate in and how it contributes to know where all safety sort of platform and focus that we're seeing across all hospitals.
Okay, and then just as my follow up yeah talking about double digit growth in the narrow vascular business. Just curious thing to get your thoughts on how sustainable you think that is what I found with a new product classes you have happening in 10th 2021.
Yeah look where we're accustomed to seeing her neurovascular business to double digit growth. This is something they've been doing for you know since we acquired the business almost once the target launches got rolled out in the <unk> segments started to grow and.
And now that we have to put averting sent in the U S market.
China market's continuing to grow they're very strongly so no <unk>, we expect to continue double digit growth for for some time with a tailwind and Asheikh and and now you know really addressing <unk> and aspiration, we'd really got pay that we had a terrific management team for for a long time and then they continue to be humming and we expect that is Mr. <unk>.
You need to perform extremely well.
Yeah. Once again ask a question. Please press star one on your telephone keypad and you have a question from <unk> with one free sandwiched you May proceed.
Hi, Thanks, I Wonder if you could spend a bit more time on the a C. In an outpatient environment I think once upon a time there were you know questions around the category that there were probably rooted in some concerned about pricing, but in this environment. It's it's clearly a tailwind I know there was a question already about market share, but can you speak a little.
A bit about your procedure growth trends in a season outpatient relative to hospitals you know how much you think that's a sustainable trend you know beyond Covid and how do you think about that commercially and as much as it could be a structural advantage is a multi line player versus a more concentrated you'll one specific player.
I do have a follow up.
Yeah look first let's start by keeping in mind that a small number of our procedures just let's call. It around 10% off our guard a large joint spine procedures are being done in the S. C. So it's not a big big part of our business yet, but the trend is no doubt headed for more of these procedures being done on me I see part of that has to change in Medicare around knees, and we expect that to have.
And and hips and so it's a trend that was already happening pre pandemic, it's a trend that will accelerate going forward.
There's all kinds of pregnant on vacations about how much it'll be it could it be 50 per cent of our procedure. So you know it's hard to predict how fast it'll move, but we believe we're really really well positioned for this trend.
And then we do intend to be a multi line player that's what the AFC actually once it's unlike how the hospitals by they they have a different fine pattern in the in the surgery center in the breath of our portfolio was a huge advantage and we plan to to really leverage that strength wherever we can so we were feeling very good about it that's the trend.
That in terms of pricing, we're not seeing really any change so far and the pricing dynamics. There. There is a constrained around capital S. He's are are much more capital sensitive. So we do tend to have more financing involved in surgery centers, but but we're all equipped to do that with our flex financial you know we've been doing financing for for a long long time. So so we're feeling very good about.
Her position to be able to win a mirror as soon as we do think it's gonna be more important and and the trend Willock Sullivan.
Okay that that was actually fantastic answered you answered my next question. So I'll leave it there. Thank you so much.
Okay, great. Thank you.
And at this time that I'll turn the call over to Mister Kevin <unk>.
So thank you all for joining a call. We look forward to sharing are too poor results with you in January and that's <unk>.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
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Okay.