Q3 2021 Stryker Corp Earnings Call
For today's call at this time all participants are in a listen only mode. Following the conference you will conduct a question. Following the conference we will conduct a question and answer session.
During that during that time participants will have the opportunity to ask one question and one follow up question. If you like to ask a question. Please press Star then one on your Touchtone phone.
This conference is being recorded for replay purposes.
Before we begin I would like to remind you that the discussions during this conference call will include forward looking statements.
Factors that could cause actual results to differ materially are discussed in the company's most recent filings with the SEC.
Also during the discussions will include certain non-GAAP financial measures.
Re concept the consultation and the most directly comparable GAAP financial measures can be found in today's press release that is an exhibit to Strykers current report on form 8-K filed today with the FTC.
I will now turn the call over to Mr. Kevin Lobo, Chairman and Chief Executive Officer, you May begin Sir.
Thank you welcome to Strykers third quarter earnings call. Joining me today are Glenn mainline Strykers CFO.
Preston Wells, Vice President of Investor Relations.
For today's call I'll provide opening comments, followed by Preston with an update on the trends we saw during the quarter Glenn.
Glenn will then provide additional details regarding our quarterly results.
For opening the call to Q&A.
During the quarter, we posted organic sales growth of eight 4% versus 2019.
Driven by excellent double digit growth from our med surge and Neurotechnology businesses.
But this was offset by softer sales of hips knees and spine due to the resurgence of COVID-19.
The slowdown in deferrable procedures, primarily impacted the U S and the worsening through the quarter.
While our implant businesses were challenged we saw strong results for our Mako robotic technology and capital products across our <unk> portfolio.
In addition, we had strong performances from our more emergent businesses, including our core trauma business and another standout performance by neurovascular.
International organic growth of 12% again outpaced growth in the U S representing robust performances.
The lessening impact of COVID-19 across most major geographies include.
Including strong results across Europe, Australia.
And emerging markets.
Our year to date organic growth of seven 6%.
And with the continued uncertainty related to Covid recovery.
As well as health care staffing shortages, we are updating our full year organic sales growth guidance to 7% to 8% compared to 2019.
Our capital or equipment order book remains strong and we are well positioned for the eventual procedure recovery.
Our adjusted EPS grew 15% versus 2019, and we continued our focus on driving cash flow.
Leading to a year to date cash conversion of 87%.
The EPS growth although solid.
Was lower than our expectations and is reflected in our updated guidance, which Glen will elaborate on.
Meanwhile, we are pleased with our cash flow performance, which provides us with additional flexibility for future M&A opportunities.
While the quarter did not progress as we had anticipated due to the Delta variant we remain confident in the outlook for our businesses as evidenced by our strong international Med search and Neurotechnology performances.
We expect these businesses to continue to perform at high levels with the uncertainty most concentrated and deferrable procedures in the United States.
We continue to feel bullish about our longer term prospects has the pandemic receipts.
With our proven strategy and strong fundamentals.
We are excited to share more with you at our upcoming analyst day on November 18th.
I will now turn the call over to Preston.
Thanks, Kevin.
Our comments today will focus on providing additional insights into the current environment, including how certain products and geographies performed during the quarter.
In addition, I will provide an update on the continued integration of Wright medical including the performance of our combined trauma and extremities business.
During the during the quarter significant spikes of the Covid Delta variant drove increased infections, and hospitalizations that required higher hospital bed utilization, which ultimately led to the deferral of elective procedures and.
In addition to increased hospitalization hospital staffing shortages also pressured procedural volumes throughout the quarter.
This primarily impacted our implant related businesses, including hips, knees and spine, which can be in many cases deferred for a period of time how's.
However, the disease states that we treat our degenerative and the patients that deferred their procedures will eventually return to have those procedures completed.
The impact on elective procedures was more pronounced in the United States than on other geographies outside the United States.
Within the United States, there were areas of disruption in most states, but disruption was more widespread in the southeast and southwest portions of the country impacting major markets like Florida, and Texas throughout the quarter.
Other markets around the world, including China, Japan, and Australia experienced intermittent lockdowns throughout the quarter, which also drove uneven results across our implant related businesses in those markets during.
During the quarter, Europe, which was more impacted by COVID-19 in previous quarters had impressive organic growth compared to 2019.
Covid related hospitalizations in the United States began to trend upwards towards the end of July and then progressively worsened, peaking at the beginning of September at the end of the quarter infection and hospitalization rates were declining and impacted regions and has continued into October as a result, we are beginning to see some improvements in our more impacted businesses.
Through the first weeks of a few weeks of October.
However, we expect the recovery will be partially muted by the continued hospital staffing challenges and ongoing COVID-19 related volatility.
Our assumption for the fourth quarter is that deferrable procedures will gradually return starting with a low base in October before returning to more normal levels by the end of the quarter.
As a result, we expect that the fourth quarter growth rates for our more deferrable businesses will be similar to the third quarter.
Despite the ongoing challenges with elective procedures, we had strong performances in our emerging businesses like neurovascular, which grew strong double digits compared to 2019 as a result of continued market expansion and ongoing global demand for our innovative technologies. In addition demand for our capital equipment remains healthy.
As evidenced by our continued strong sales performance and robust order book for small and large capital products, including our surgical technologies emergency care and neurosurgical businesses.
The ongoing strength in capital is also reflected in the continued demand for our Mako robotic technology, our industry, leading Mako robot continues to help surgeons improve patient outcomes by knowing more than cutting less.
This trend across capital is expected to continue as hospitals take advantage of flexible financing and prioritize capital products like those within our portfolio that are critical to providing emergency care driving profitable procedures, and ensuring safe working environments for caregivers and patients.
Turning to the right medical integration, which continues to progress in all regions and functions the United States' commercial integration has moved past the sales force realignment and is now focused on continued business process improvement and system efficiencies.
Teams have also developed long term product pipeline strategy.
Outside the United States, we continue to work through integration activities, including sales force and indirect channel alignment across all key geographic regions. Overall, we remain pleased with the progress and the pace of integration over the past year.
Including Wright medical the combined U S trauma and extremities business has grown eight 1% year to date the.
The year to date growth in the United States has been driven by strong double digit growth in both our core trauma in upper extremities businesses, reflecting the execution of the sales integration in the United States.
Outside the United States sales have declined three 8% year to date, driven by timing of distributor conversions in Latin America, and Asia Pacific and declines in our legacy Trust and trauma business in China as a result of the provincial tendering process.
Considering the latest results ongoing COVID-19 related volatility and the provincial tenders in China, We now expect our combined trauma and extremities business to grow mid single digits for the full year with that I will now turn the call over to Glenn.
Thanks, Preston today, I will focus my comments on our third quarter financial results and the related drivers our detailed financial results have been provided in today's press release.
As a reminder, we are providing our comments in comparison to 2019 as it is a more normal baseline given the variability throughout 2020.
Our organic sales growth was eight 4% in the quarter. The third quarter included the same number of average selling days as Q3 2019 in Q3 2020.
Compared to 2019, the two year impact from pricing in the quarter was unfavorable to 2%.
Versus Q3, 2020 pricing was <unk>, 7% unfavorable.
Foreign currency had a favorable one 2% impact on sales.
Our med surge in neuro tech businesses saw another very strong quarter, continuing the growth momentum of the second quarter with double digit growth in both segments.
Our orthopedics and spine businesses have been adversely impacted by increases in hospitalization rates starting in early August, especially in the U S. As a result of the Delta variant.
The corresponding impact on elective procedures has significantly slowed the recovery in our orthopedics and spine implant businesses.
For the quarter U S organic sales increased seven 1%, reflecting the continued strong demand for Mako instruments medical and neurovascular products.
International organic sales showed strong growth of 12% impacted by positive sales momentum in Europe, Australia, Canada and emerging markets are.
Our adjusted quarterly EPS of $2 20 increased 15, 2% from 2019, reflecting sales growth gross margin expansion and a lower quarterly effective tax rate, partially offset by the impact of business mix and higher interest charges, resulting from the Wright acquisition.
Our third quarter EPS was positively impacted from foreign currency by four.
Now I will provide some highlights around our segment performance.
Orthopedics had constant currency sales growth of 19, 9% and organic sales growth of 2%, including organic growth of 1% in the U S. This reflects the impact of the slowdown in electric procedures as a result of the Delta variant, which primarily impacted our hip and knee implant businesses.
Our knee business grew 9% organically in the U S. Reflecting the previously mentioned impact on elective procedures offset by continued adoption of our robotic platform for total knee procedures.
Our U S trauma business grew eight 8%, reflecting solid performances across the portfolio.
Other ortho grew 19, 8% in the U S, primarily reflecting demand for our Mako robotic platform, partially offset by declines in bone cement.
Internationally Orthopedics grew four 1% organically, which reflects the strong performances in Europe and the momentum in Mako internationally somewhat offset by the increased impact of restrictions imposed on elective procedures due to COVID-19, especially in Japan.
For the quarter, our trauma and extremities business, which includes right medical delivered three 2% growth on a comparable basis in the U S. Comparable growth was seven 4%, which included double digit growth in our upper extremities business.
In the quarter Med surge had constant currency and organic sales growth of 12%, which included 12% U S organic growth as well.
Instruments had U S organic sales growth of 15, 9% led by double digit growth in their orthopedic implants, and surgical technology businesses, which include power tools and waste management smoke evacuation.
And skin closure products.
Endoscopy had U S organic sales growth of 10, 6%, reflecting strong performances across their portfolio, including video and general surgery products and strong double digit growth of their communications and sports medicine businesses.
The medical Division had U S organic growth of 12, 5%, reflecting double digit performances in its emergency care and sage businesses.
Internationally med surge had organic sales growth of 12%, reflecting strong growth in the endoscopy instruments and medical businesses across Europe and Australia.
Neurotechnology and spine had organic growth of 11, 8%. This growth reflects double digit performances in our neurovascular neurosurgical and interventional spine businesses.
Our neurovascular business had particularly strong growth of approximately 26% and makes up roughly 30% of this segment.
Our U S. Neurotechnology posted an organic growth of 11, 8%, reflecting strong product growth and sort of pet IQ bipolar forceps and bone mill.
Our U S neurovascular business had significant growth in all categories of products, including <unk> flow diversion and ischemic.
Internationally, Neurotechnology and spine had organic growth of 24, 6%. This performance was driven by strong neuro tech demand in China, and other emerging markets as well as Europe and Australia.
Now I will focus on operating highlights in the third quarter. Our adjusted gross margin of 66, 3% was favorable approximately 55 basis points from third quarter 2019.
Compared to the third quarter in 2019 gross margin was primarily impacted by acquisitions, which was partially offset by business mix and price.
Adjusted R&D spending was six 7% of sales, reflecting our continued focus on innovation.
Our SG&A was 34, 1% of sales, which was slightly negative as compared to the third quarter of 2019.
This reflects continued cost discipline and fixed cost leverage offset by ramping of certain expenses hiring to support future growth and the dilutive impact of the Wright medical acquisition.
In summary for the quarter, our adjusted operating margin was 25, 4% of sales, which is approximately the same as third quarter 2019.
This performance primarily resulted from our positive sales momentum offset by the dilutive impact of acquisitions, primarily Wright medical.
Related to other income and expenses compared to the third quarter. In 2019, we saw a decline in investment income earned on deposits and interest expense increases related to our debt outstanding for the funding of the Wright medical acquisition.
Our third quarter had an adjusted effective tax rate of 14%, which was impacted by our mix of U S. Non U S income and favorable discrete items during the quarter our year to date effective tax rate is 14, 8%.
For the year, we continue to expect an adjusted effective tax rate of 15% to 15, 5%.
Focusing on the balance sheet, we ended the third quarter with $2 6 billion of cash and marketable securities and total debt of $12 7 billion year to date, we have paid down $1 2 billion of debt in October we completed the refinancing of our revolving credit facility, an increase that facility from $1 5 billion.
To 225 billion.
Turning to cash flow our year to date cash from operations was approximately $2 3 billion. This performance reflects the results of earnings and continued focus on working capital management.
Based on our performance in the third quarter. The continued volatility experienced as a result of COVID-19 procedural delays in hospital staffing shortages as well as uncertainty around the pace of recovery in the fourth quarter. We expect 'twenty, one 2021 organic net sales growth to be in the range of 7% to 8%.
As it relates to sales expectations for Wright medical we now expect comparable growth for trauma and extremities to be in the mid single digits for the full year when compared to the combined results for 2019.
If foreign currency exchange rates hold near current levels, we expect net sales in the full year will be positively impacted by approximately 1%.
Adjusted net earnings per diluted share will be positively impacted by approximately 5% to 10 in the full year and this is included in our revised guidance range.
Based on our performance in the first nine months and including consideration of the aforementioned volatility impacting the recovery of elective procedures and the full year Wright medical impact. We now expect adjusted net earnings per diluted share to be in the range of $9 eight to $9 15.
And now I will open the call for Q&A.
Thank you we will now begin the question and answer session. If you have a question you will need to press star one on your telephone if you wish to remove from the queue press the pound key as a reminder.
<unk> will be limited to one question and one follow up question.
And your first question comes from the line of Robbie Marcus with JP Morgan.
Oh, great. Thanks for taking the questions.
Maybe just start on guidance it sounds like October is off to a slower start maybe just if you could walk us through the different business lines, and how youre seeing them throughout fourth quarter. So far and what gives you confidence that you can start to see a pick up do you have.
Our orders, increasing our doctors increasing bookings just help us understand what gives you confidence for the tick up.
Hey, Ravi it's Preston so in terms of Q4 and as I mentioned in my prepared remarks. We saw October is starting to show some improvement as it relates to our implant related businesses and so we are seeing a bit of a pickup but I think it's important to note that it's starting from a lower a lower starting point. So while we do expect there to be some recovery happening in those <unk>.
Plant businesses throughout the quarter, we do expect it to get back to more normal levels by the end. There are a few headwinds that are out there as well in terms of not only additional COVID-19.
Hotspots or things like that but also with staffing being a potential headwind as well. So we're definitely monitoring those as we go but we are seeing some improvement early in October versus where we ended in Q3 as it relates to the other parts of the business is both Kevin and myself mentioned, our capital business continues to perform.
Very well and we still have high expectations that those are going to continue into Q4 really in the way we look at that as just continuing to look at the order book as we ended the quarter and how that continues to progress in terms of growth same thing as we think about those more emerging businesses, whether it's trauma. Our neurovascular again those businesses are continuing to perform very well.
And there is no reason to believe that theyre going to slow down as we as we think about Q4, so hopefully that helps.
Yeah and.
And maybe one more just to dive in a little deeper on the trauma and extremities, you talked about double digit growth within shoulder, but that was probably the biggest miss of any business versus the street. So I was hoping you could give a little more detail there was lower really slow it doesn't sound like it's anything from the integration. So just hoping to get more color.
Yes, no I think it's important to understand that on those those parts of the business like extremities like shoulder like foot and ankle. They are subject to some of the elective procedure slowdown as well so while they did see some of that impact we are still really happy with how they performed I mean, they really are still growing the integration is going well and as I mentioned in.
Terms of the international piece, there is a little bit slower pick up there on some of the international businesses as we go through the transition and integration in those parts of the business.
Great. Thanks, a lot.
Your next question comes from the line of Matt <unk>.
Matt Your line is open.
Hi, Thanks for taking the questions.
So I had.
Maybe first thing I guess I would say.
At this point I don't think Youre comments on Covid related pressure on staffing challenges will come as much of a surprise to many folks who sort of dragging us into the print and looking into Q4.
But I did have a couple of questions on.
Some aspects of your business, one sort of Covid related.
And sort of related to one of your sort of strategic initiatives around asc's.
If you could talk maybe a little bit about the activity that youre seeing there.
What kinds of changes you've made your organization what kinds of shifts in volumes, we've seen in <unk> and how you think that may affect sort of the intermediate.
Intermediate term for those.
One follow up.
Matt This is Kevin.
We're continuing to see a shift to the ASC.
Challenge, we have right now is just the pace of the capacity it takes time to build.
And every hospital system is in the process of trying to increase their capacity.
So it is improving and certainly that'll be a trend that was started prior to the pandemic and is continuing.
We feel very good about our position in the ASC. It's way ahead of our expectations frankly going into the pandemic.
One measure that we look at is our sports medicine business and that performed in the United States was north of 20% growth in Q3, So we're seeing strength, but the challenge on the hip and knee side of it is just time to build capacity.
So it's growing but it's going to just take time before it becomes a really really meaningful part of our business, but we believe we're extremely well positioned.
Both with Mako, and even without Mako with our portfolio ever.
Everything that they need for for Nancy.
That's helpful. And then my follow up is just on maybe trying to look past that.
Pressure that.
Many folks are reporting this earning cycle.
Or to what you're describing.
And and into sort of next year or anything of that sort of.
Try to pry guidance out of you or anything like that for 2022, but.
One of the things that we hear often from your businesses and across the board as the sort of demand for capital equipment and if we look at it.
Challenges in procedures and staffing issues and then on the other hand hospitals, apparently investing fairly heavily in the capital equipment.
And infrastructure around robotic surgery et cetera, and I, just would love to hear your thoughts.
If you see a relationship as seen in the past the relationships.
Between capital and Youre procedural businesses.
And what that sort of tells you about the next 12 to 18 months on the back of this demand.
Well I think the capital strength is really given the liquidity of hospitals, so hospitals, even though theyre struggling through the pandemic.
Our liquidity is very good.
Partially due to the cares funding that was put in place there.
They are in strong position and they are getting ready for the future.
As we talked about on the last question about Asps and construction of <unk>.
Investments in hospitals the demand for technology is very strong our order book for capital is very strong.
And they are in fact in Q3, there was actually even some slight delays of some of the capital.
There were some challenges of actually having staff to receive some of these capital equipment and put it in place, but I would say I'm feeling very bullish on that capital cycle should continue speaking in the United States through all of next year as it relates to the.
Deferrable procedures hips knees spine.
Those represent for Stryker, a little less than 30% of our sales.
And those are the ones that are most impact if they will come back and frankly, I'm excited about certainly hip and knee, where the Mako volume continues to grow and win those procedures come back.
We're in a terrific position to capitalize on those up because the Mako procedures were putting in roughly half of those are going into competitive accounts and so when volumes come back we will be able to really take advantage of that not just in our in our own stryker friendly accounts, but even in competitive accounts.
Your next question comes from the line of Anthony Petrone with Jefferies.
Hi, Thank you for taking the questions.
Couple on <unk>.
Just just attempting to quantify the backlog specifically in ortho recon heading into 2022 as we navigate the current delta Spike and maybe extending that the capital are you actually seeing some level of pent up demand for Mako and maybe just to sneak a quick one in there maybe just some high level comments.
On supply chain pressures that were hearing across obviously this space and others.
Is that a potential headwind to the capital business, specifically as we head into 2022. Thank you.
Perfect. So let me let me see if I can address those different parts. So in terms of the backlog itself and so just starting with the implant related backlog I mean, obviously the last 18 months has not been normal from a volume perspective, and so while we've had some good quarters and some some slower quarters that backlog has continue to exist and in some cases like.
This quarter, it's continued to build and so it's hard to say exactly what it is because there's just so much variability thats happening across different regions. So if we look at this past quarter, obviously, the U S was more impacted than other areas, but it's safe to say that the backlog still exists and as we think about what's going to happen with that we think that over time as we get back to more normal levels.
That backlog will begin to work down and so youll see some improvement in terms of growth rates over time, it'll be sustained you won't really see a big.
Large out.
Outsized growth rate that'll happen in any one particular quarter with regard to the backlog as we think about capital I mean, there are areas for sure that theres been some pent up demand as some of the uncertainty.
Just existed out there in terms of some of the hospital systems in but we're still seeing very strong demand for our products like we've talked about before the order book remains really really strong.
And it continues to grow as well as sales. So we feel very bullish as Kevin said with regards to how we think about capital as we go forward into 2022.
With regards to the impacts from a raw material or supply chain perspective, what I would tell you is there certainly are challenges just like everybody else has with regards to whether it's the tight labor market or shortages and things like electronics or resins.
But as of now we've been able to really effectively meet all of our customer needs and so what that really has required is that our supply chain has really had to be much more active and its support and its partnership with the various <unk>.
Supplier base that we have and so we've been able to really make sure that we're maintaining our safety stock levels were really able to actively purchase critical components, where necessary. So that we can keep production going and then also just around logistics and distribution as well and working actively with those partners all of that in anticipation of the fact that we think that.
There is going to continue to be some headwinds in this area.
So as a result, we have seen some increased costs as well.
Terms of inflation on those items, but to date, our supply chain and procurement teams have really just been able to manage that.
And so we haven't seen anything really show up in terms of any major impacts on our financials and so while we expect that to continue.
Rest of 'twenty, one and into 'twenty into 2022 as well.
Do we want to make sure that whatever we have in our numbers has already been factored factored in some of those raw material challenges that we have and we're going to just continue to monitor the situation as it as it progresses.
Thank you so much.
Your next question comes from Matt Taylor from UBS.
Hey, everyone. This is Joe.
Lee in for Matt. Thanks, so much for taking our questions.
I guess I was wondering if you can.
Sure a little bit more color on the.
Strength youre seeing in Mako.
Both in the U S and O U S.
How do you think its position relative to the to the competition now that there's more entrants.
In this space.
And can you also touch upon the Maple shoulder program.
What should we expect in terms of.
Uh huh.
Targets that you are looking at.
Any updates on the timeline.
So at the Mako.
Business momentum continues and it has been strong throughout the pandemic. So in spite of the procedural slowdowns, we're seeing strong demand for our system. We clearly have the leading system on the market with a big head start versus the competition and frankly the competition has actually raised the water level of robotics and raised the importance.
Robotics, So we love our position and we believe that it's just going to increase the demand for Mako more and more systems are ordering their second and third and fourth Mako.
So we know we have a winning solution for customers.
We're excited frankly, with our hip software and our new hip application.
Which which is now penetrated in all of our our Mako accounts and we're seeing a nice uptick even though the overall volumes are down because of Covid. We are seeing a nice uptick in the hip adoption given.
Given the new software, which makes it easier to do the procedure. So we feel like we're in a very good position and the fact that theres more competitors space just validates the importance of orthopedics and we like our chances.
As it relates to the shoulder program and we do have an active program. We're not in a position right now to talk about timelines are dates for that but as you saw with our results in Q3, our shoulder business is doing very well even before we have a solution with makeup.
Okay, Great I appreciate the color there.
Maybe to follow up I was wondering if you can talk about.
M&A.
Unscathed.
All actively are you looking at deals what do you think about.
Correct.
<unk> right now.
We are always actively looking at deals at Stryker, even after the Wright medical deal as you saw we've done a couple of smaller deals with ortho sensor and golf surgical.
Because of the debt that we had to pay down we have been focused more on tuck ins, but I'm really delighted with the cash flow performance that we've had.
Both last year as well as the first nine months of this year. So now we can start to look at let's say slightly larger tuck ins, while we continue to pay down the debt.
Valuations are very high overall, but theres still a lot of targets and we feel pretty confident that we'll be able to continue to run our M&A no offense and find value, creating acquisitions for sugar for Stryker.
Okay.
Okay.
Just a quick reminder to ask a question you will need to press star one on your telephone and if you wish to remove wished to be removed from the queue.
The pound key.
Your next question comes from the line of Matt O'brien with Piper Sandler.
Hi, guys. This is drew on for Matt. Thank you for taking the questions.
I just was wondering if you could talk about Mako in China and Japan.
It's been a bright spot in some areas and a mixed bag and others for.
A handful of companies that have reported so far so just wondering how you would characterize that rollout and each of those geographies yes.
Yes, so I would just say that in terms of Mako as we think about outside the United States. We're really pleased with how thats progressing and we're seeing good growth really in all markets outside the U S.
As we think about Japan. For example, we know that the business continues to progress well and the number of installs in Japan, who is increasing month over month. So we're really happy with how the technology has been received and the feedback that we're getting.
And the number of procedures that are being done on Mako in Japan continue to increase as well as far as China is concerned it's much earlier days in China from a macro standpoint, but the momentum is really building there.
Still working through the impacts of the <unk>.
Volume based procurement activity, but we do expect and May go to be a key technology in a key role for US play a key role for us as we think about our recon business in China going forward.
Okay. Thanks for that.
And then just a quick follow up here on the neuro vascular side.
The performance has been really really strong last couple of quarters.
So maybe kind of give us a sense for what you think the market growth rate looks like there and then just.
In a sense for what's driving your portfolio of products to really take share compared to quarters in the past. Thank you.
Yes, so in terms of neurovascular, obviously, it's a very hot market and but also when you look at our results with regards to that market Youre seeing a couple of things happen, you're seeing really the impact of the technologies that we've been able to introduce over the past 12 months to 18 months and taking advantage of really.
Product Super cycle really from our neurovascular team, where we're expanding into some different areas and then also we're seeing the market expand so if you think about places like China. For example, we're seeing market expansion happened. There. So our results are really a result of both of those items.
Your next question comes from the line of Vijay Kumar with Evercore.
Hi.
Hey, guys. Thanks for taking my question.
Maybe one on the big picture and one on the finance side.
Starting with the Big picture Kevin.
It seems like Theres, a tale of two cities in device learn some of your peers have Q4 sort of normalizing on the procedure side.
Other companies certainly have cargo Q.
Q4 being in line with <unk> levels and thinks worsening.
Or perhaps being being similar to <unk>.
September trends.
Is this more regional especially this is a <unk> impact or is this an ortho versus other parts of the lifestyle, maybe just put things into perspective.
While we were seeing with diversions.
What are you assuming for.
The Q4 recovery.
As Preston mentioned the Q4, we're assuming a similar growth rate as we saw in Q3, so versus 2019, we're expecting similar kind of growth rate, obviously sequentially. We'll have improvement because Q4 is a larger quarter than Q3, but year over year, we're expecting a similar growth rate.
Related to that question I would say that the it's really ortho and spine related.
That's the bigger factor. So we have products that are used in general surgery in our Endoscopy Division.
Smoke evacuation and we're not seeing the same kind of fall off in those areas as we're seeing in hips knees spine. So I do believe it's mostly procedure related which creates the difference that you are describing between us and <unk>.
Some of the other med Tech companies. There's also regional Streicher of course has a very strong presence in the United States and so that regional impacting you even saw that with our own implant businesses that we had a more negative impact in the United States than we did in international and so that's the secondary factor, but I would say the primary factor for what Youre seeing versus.
As other companies.
Is that these procedures hips knees spine are more deferrable than some of the other procedures and some of our other med tech peers.
That's helpful perspective.
On the finance Glen.
Free cash conversion year to date, we're running pretty close to 90% has.
Has something changed here.
People used to ask them free cash conversion.
And the execution here, despite some choppiness on the <unk> side the.
Margin execution free cash execution tier seems to be stellar. So I'm curious has anything changed for you guys on the free cash side.
Yes Vijay.
Youre right free cash flow of almost $2 1 billion year to date and 87% conversion ratio.
A lot of it a lot of it has to do with several factors, we've been sort of priming.
The organization to really start focusing and delivering on cash flow I think as we entered into Covid. It was a real alarm bell for Hey, let's really start focusing on this so that we can sort of keep active in M&A. We can pay down debt. We can meet a lot of the sort of goals that we want it to me. So I think we're.
Feeling a little bit of that you look at.
Performance on AAR, we've started to move a lot of our AAR into shared service centers and so we're getting better on process.
You look at AP, we have a large initiative thats being driven by our <unk> organization in terms of working with vendors and being smart about what what our AP terms can be and should be and then all of our divisions are very focused on inventory management and just being smarter about what what are the safety stock levels that you really.
We need and what don't you need and how can we make sure that we're having the right inventory at the right time, when we need it and then I think the other thing that we're feeling a little bit as well.
We have been.
Fairly controlled and prudent as we look at allocating dollars to capital expenditures and as you look at our Wright medical integration, we've really been.
<unk> focused on that spend as well and are running probably a little ahead of where our goals. We're on that so I really do think that it's a muscle that the organization has really learned and has grown over the past two years and it's something that I feel pretty strongly about we will be able to continue from here on out.
Your next question comes from the line of Josh Jennings with Cowen.
Good afternoon, thanks for taking the questions.
Yes.
Just a.
Question on staffing shortages, and maybe a little bit, but just thinking about.
The different.
Settings of care.
Staff sorted use in hospitals and it gets clear, but I was wondering about ASC is.
Is there a different dynamic in play at Asps.
And if this staffing shortage headwinds persist into 2022 do you think we could see even stronger migration trends.
Of surgeries into.
<unk> predictive also.
Yes, Josh in terms of staffing shortages I mean, we're seeing it really holistically I mean, I think it certainly is playing itself out more so in the hospital setting because of obviously, there's a lot more fatigue. That's been there. There's COVID-19 is still exists in the hospital setting.
I think that it certainly is playing out a bit more in the hospital setting and can be haven't we've still seen our procedural volumes in the AFC will continue to go and certainly have not been as impacted as those in the hospital.
How that continues and how that impacts the shift I think is still really anybody's guess I mean, we certainly will continue to expect to see products and procedures shifting to the ASC anyway, because thats that that trend that's already started and certainly accelerated over the last 18 months. So I think that's going to continue to happen. The staffing shortage is something that I.
We're going to live with for a little bit as well and so we will continue to work through those challenges in the next year also.
Thanks, Chris.
Wanted to just follow up on <unk> I know you reiterated multiple times on this call just got integration is progressing nicely.
You're optimistic about the combined.
Businesses in trauma extremities, but.
<unk> had to work through some dis synergies associated integration can pandemic headwinds.
November close is coming up but as we get into normalized periods should we be thinking about the trauma choices as accretive to corporate wide organic revenue growth.
Integration is first tiers completed hopefully to get into a normalized grades in 2022, thanks a lot.
This is Kevin I would say that absolutely bullish about the Wright medical integration, it's been fantastic in the United States.
As Preston mentioned, we still have work to do outside the United States.
<unk> is a little bit later with some of the conversions of our distributors and so we're still working through the O U S. But in the U S very bullish about core trauma upper extremities and lowering our lower of course has been impacted somewhat by the deferral of procedures because they are more elective a lot of the foot and ankle procedures, but love the leadership team that we have.
And place loved the pipeline that we have in place.
And really believe that the entire business of trauma extremities will be accretive to overall Stryker as you know extremities is probably the fastest growing space within orthopedics.
And we have a fantastic portfolio of combined portfolio in both upper and lower extremities, but I think one of the side benefits of the Wright medical.
Integration has been for US to also have a dedicated business just on trauma. So three dedicated businesses three terrific leaders of all businesses and great leadership teams and so we're seeing that frankly as you saw with the U S number on a combined basis being over 8%.
It is really a terrific performance in spite of a slowdown in the foot and ankle space the overall businesses.
Forming very well and I do expect in 'twenty, two and beyond that it will be accretive to strykers overall growth rate.
Operator.
Hello.
Your next question comes from the line of Larry <unk>.
With Wells Fargo.
Hey, guys. Thanks for taking the question.
Two for me one you have an analyst meeting coming up in a few weeks.
Could you guys give us a preview of what to expect or you're going to.
Give us long term financial goals and I had one follow up.
Hey, Larry its presence, yes, we're really going to really talk about all the growth drivers that make Stryker special as we think about emerging from the pandemic and all the different things that are going to help our business continue to grow into the future for sure.
Long term financial goals, what will definitely be part of that.
That's helpful.
And I know you are not going to talk.
Specific guidance about next year, but no Kevin or Glenn how are you feeling about <unk>.
<unk> to deliver top tier revenue growth and the 30 to 50 basis points.
You know leverage that you guys target how are you feeling about that with the inflation headwind that we're all paying close attention to thanks for taking the questions.
Sure on the first question as you've seen over the last nine years and fully expect into the future that we will have organic sales growth at the high end of Med Tech.
Nearly colgate has put a crimp on that.
And hips knees and spine, but other than that youre seeing that in all of the rest of our businesses and as the recovery happens you should fully expect.
That will continue to be a top tier grower as it relates to margins Glenn do you want to yes, I look at op margin first of all even just look at this quarter and given the impact of Covid given the dilution from Wright medical I mean, we're pretty happy that our op margin is pretty much flat with 2019. So that's a good performance.
We did not contemplate the impacts we're feeling from Covid in op margin guidance and so we'll talk about more at the analyst meeting sort of what we think that means but what I will tell you is.
We have every intention to drive that goal once we exit the impacts of Covid. So the organization will not back away from that.
And we'll even during Covid, we're very mindful of our discipline around spending and how important that is.
We'll expect to see some increases in spending in Q4.
And those will set us up to grow in 2022, so we really will allow sort of spending around some of those.
Sales force hiring and marketing initiatives to occur, but as far as it relates to 30 to 50 basis points.
Beyond what we feel in Covid, we will not back away from that goal.
If you'd like to ask a question you will need to press star one on your telephone if you wish to remove be removed from the queue press the pound key.
Your next question comes from the line of Steve Lichtman from Oppenheimer.
Hi, This is David on for Steve Thanks for taking our questions.
I was just wondering if you could maybe talk about what youre seeing currently in terms of the China tenders and volume based procurement and what are your expectations for the impact of that next year.
So I guess first of all when we start thinking about our business and we think about China. We think about the products and services that are that are impacted by the volume based tendering. If we think about jr. Trauma and spine. Those sales really are that are exposed to the tendering process are less than 1% of the total stryker revenue. So it's a very small overall impact.
As we think about.
For Stryker, but I guess, just focusing on the tender itself in mid September as everybody knows they are bidding was done for the national tender around joint replacement.
Our bids we're certainly competitive and we secured a position for both hips and knees for our business.
Overall as everybody also knows about 80% price reduction from the end market sale is going to be taking place across the entire industry and so certainly that has an impact on us as we think about going forward, but there's a lot of work still left to be done in terms of how that's going to actually be executed. So we're staying vigilant with the teams in China to try to understand.
How that is going to rollout is expected to rollout I think in the first quarter of next year and so it will it.
It will remain dynamic until we really understand how it is going to execute in terms of 'twenty. Two we're not giving guidance at this point in time and it will certainly be factored in as we give guidance on our fourth quarter earnings call.
Okay, Great I appreciate all the color.
One follow up.
What are your latest thoughts on this.
Martin implants, and what's your outlook for this market now having ortho sensor under your umbrella.
Quarter.
Yes, so with smart implants, I mean, like we've said in the past we think that there is a role that smart implants are going to play with regards to orthopedics going forward, but there's still a lot of work to be done in terms of understanding how that is going to be integrated from a from an implant and then understanding how that's going to play out from a monitoring standpoint going forward. So I would say it.
Early in the process, we're happy to have ortho sensor.
Under the Stryker name and certainly the expertise that they bring into sensor technology and so looking forward to updating you as we develop more around that product in the future.
Yeah.
Okay. Thank you.
Your next question comes from the line of Ryan Zimmerman with BTG.
Hey, Thanks for taking the question. So I just wanted to ask specifically based on the organic growth guidance of seven 8% from 19 and kind of where consensus is landing obviously, there is a delta there and you've ready it's clear obviously around the elective areas in terms of the impact in the fourth quarter and kind of what you're guiding to I guess I'm, just curious Kevin or <unk>.
And if there's anything you would call, particularly within the med surge areas from a headwind standpoint there.
Portion is about just because the delta versus the street is somewhat meaningful as we think about our models and so I just want to make sure that we're not.
Skipping over any impact that you could be have is contemplated within that.
Just to reiterate.
I reiterate what I said in my opening comments, we expect very high performance for med surge in Neurotechnology. So.
So we expect them to perform very similarly, it may not be some puts and takes between the businesses a little bit but overall you should expect similar growth out of med surge in Neurotechnology and Q4 as you saw in Q3, so the delta versus the street is clearly in the in the hip knee and spine area. That's the area. That's that's had the biggest impact.
From Covid and what we're calling and our guidance is for a similar quarter in Q4 as Q3 and now obviously, we don't have a lot of visibility, it's an uncertain environment hopefully the recovery will be better than what we're calling but but thats the visibility that we have thus far.
And as you saw that this quarter surprised us Q3 and were being cautious as we gave our guidance for Q4.
No.
Totally fair I appreciate that Kevin and then just a follow up.
You have a new hips them coming out <unk> got the software now I think on the entire fleet of Makos and so.
I'd love to understand just kind of your expectation of what they do.
For you, particularly within direct interiors that J&J has been so dominant in.
For some time.
We're really excited about the new stem the procedures are being launched this quarter.
Early launch I'd call it this quarter.
And we're building up towards a full launch of the hips them at.
POS meeting, which is towards the end of the first quarter, so it'll be a bit of a slow build but we're really excited and thats stem, we will marry that stem up with Mako. So that's one of the things we still have to do that but I would say youll start to see pretty meaningful impact in probably by the end of the second quarter beginning of the third quarter.
You'll start to see meaningful impact, but but this is a product gap that we've had for some time very.
Very excited about.
<unk> that we're in.
We're building the product right now surgeons Swift <unk> seen in the product are very excited about it. So we do believe it's it's what we've needed frankly within our portfolio and you'll start to see that again, you won't see a lot you won't see anything really in the fourth quarter and you won't see much in the first quarter, but.
But it will start to have an impact in the second quarter and definitely in the back half of next year.
Okay.
If you like to ask a question.
Star one on your telephone if you wish to meet the demand from the queue press the pound key.
Again that is star one.
There are no further questions at this time I will now turn the conference over to Mr. Kevin Lobo for any closing remarks.
So thank you all for joining our call and we hope that you can all join US in person on November 18th for our 2021 analyst meeting and product fair with our broader leadership team.
Thank you.
Okay.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
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