Q4 2021 Stryker Corp Earnings Call
Welcome to the fourth quarter 2021 Stryker earnings call. My name is Emily and I'll be your operator for today's call. At this time all participants are in a listen only mode. Following the conference. We will conduct a question answer session. During that time 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 sign. This conference call is being recorded for replay purposes before we begin I would like to remind you that the discussions. During this conference call will include forward looking statements factors that could cause actual results to differ materially are discussed in the company's most recent filings with the SEC.
Oh, sorry, the discussions will include certain non-GAAP financial measures reconciliations to the most directly comparable GAAP financial measures can be found in today's press release that is an exhibit to Strykers current report on form 8-K filed today with the SEC I will now turn the call over to Mr. Kevin Lobo chat and Chief Executive Officer, You May proceed Sir.
Welcome to Strykers fourth quarter earnings call. Joining me today are Glenn mainline Strykers, CFO and 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 and our annual Mako update.
Glenn will then provide additional details regarding our quarterly results.
Before opening the call to Q&A.
As a reminder, as announced during our analyst day in November we have reclassified our reporting segments into two groups.
Certain neurotechnology.
And orthopedics and spine.
This better aligns to how our businesses are managed internally.
We have also pulled out neurovascular on its own line and have the business units of neuro surgical instruments.
M F and N T now grouped under neuro cranial.
As we have done all year, we will comment on our performance versus 2019, which we believe is a better basis for comparison.
For the quarter organic sales growth exceeded 6% versus 2019, driven by double digit growth from our med surge in neurotechnology businesses.
But offset by softer sales of our hips knees and spine as Covid and hospital staffing challenges had a meaningful impact on elective procedures during the quarter.
We posted double digit organic growth in international compared to 2019 as our globalization efforts continue to bear fruit and where COVID-19 impacts were generally less severe than in the U S.
While our more deferrable businesses were challenged we saw excellent results from our Mako robotic technology capital products across our Medford portfolio and continued double digit organic growth in neurovascular, which reached approximately $1 $2 billion in sales for the year.
Despite the unanticipated omicron variant, we were able to achieve full year sales growth and adjusted EPS within our latest guidance ranges.
Our full year organic growth exceeded 7% and reflects strong demand for our Mako and med search capital equipment and strong double digit sales growth within neuro vascular and neuro cranial.
In addition, we are very pleased with the Wright medical integration, particularly in the U S.
Our full year adjusted EPS grew 10% versus 2019, Amy delivered free cash flow conversion of 85%.
The EPS growth was a strong result, given the inflationary pressures that grew in the quarter and the COVID-19 impact on our implant procedures we.
We continue to invest in R&D at a healthy rate of six 6% of sales for the year and our new product pipelines are poised for continued success.
Our strong cash flow performance provided us with additional flexibility to execute on M&A opportunities in the quarter, including Thermedics, a small tuck in within endoscopy.
And the recently announced agreement to acquire both Sarah.
Despite the impacts of the pandemic throughout the year, we were able to surpass $15 billion $16 billion and $17 billion in revenue for the first time.
And we remain confident in the outlook for our business as the pandemic receipts.
We continue to execute on our key growth strategies, including the expansion of our E. S. C offense continued product innovation and category leadership across our businesses.
Turning to 2022, the volatility caused by Covid variance remains ongoing and is further impacted by hospital staffing challenges and supply chain disruptions.
In spite of this we expect to continue to deliver above market sales growth.
However, given the pressures on our supply chain within med surge, we do not expect to deliver our typical degree of earnings leverage with.
Continue to be disciplined with our spending.
However, we will continue to fuel new products with healthy R&D spending and will maintain our focus on above market growth, while we work through these cost pressures.
As noted in the press release, we are guiding to 6% to 8% full year organic sales growth and adjusted EPS of $9 60 to $10 per share.
As I conclude my comments I remain confident in our strategy talent and culture I would like to thank our teams for continuing to persevere in these challenging times.
I will now turn the call over to Preston.
Thanks, Kevin.
Our comments today will focus on providing an update on the current environment, including the latest impacts of COVID-19 across certain products during the quarter.
In addition, I will provide an update on Mako and recent acquisitions, including the continued integration of Wright medical and the performance of our combined trauma and extremities business.
During the quarter hospital bed and operating room capacities were challenged because of the delta very early in the quarter and most recently by the Omicron variant, which started to pressure elective procedural volumes in December .
In addition, ongoing nursing staffing shortages disrupted hospital scheduling of procedural volumes.
The delay in procedural volumes, primarily impacted our implant related businesses, including hips, knees spine and foot and ankle, which can be in many cases deferred for a period of time.
However, we know that most of these patients will eventually return to have those procedures completed as the impacts from Covid decline in procedural volumes returned to more normal levels.
A man for our capital products was strong in the quarter, including double digit orders and sales, which created a strong order book for capital products. Despite the strong capital demand there were some headwinds in the quarter that primarily impacted our medical business, including installation delays caused by hospital staffing challenges and raw material shortages primarily related to electronics.
That created some supply disruptions.
For the full year 2021 versus 2020, our global Mako installed base grew by 27%.
And we now have an installed base that is approaching 500 Mako robots.
This continues to grow this growth continues to highlight the high demand for our differentiated Mako robotic technology with.
With strong double digit growth also underscores our ongoing success installing robots and major teaching institutions.
And competitive accounts as well as our focus on expanding into international markets in the fourth quarter, we saw a meaningful increase in the percentage of robots installed into competitive accounts.
Turning to U S knee procedures in the fourth quarter over 50% of our total knees, where mako knee procedures, a trend that continues to increase and demonstrates the outstanding utilization of the Mako install base the shift towards the Mentalist knees also continued and in the fourth quarter cement less knee is made up 47% of our U S knee procedure.
Additionally, in the fourth quarter over 25% of our total hip procedures, where Mako hip procedures, which similar to knees continues to increase in utilization.
Our recently launched insignia hips, Dan will also be Mako capable by the end of the first quarter.
We expect to further our leadership position in orthopedic robotic assisted surgery through the continued adoption of our Mako Smart robotics platform on a global basis.
Shifting to our trauma and extremities business. We are now over one year into the integration of Wright medical which continues to progress well in all regions and across all functions. Despite the headwinds from Covid, including Wright medical the combined U S trauma and extremities business grew high single digits in 2021, which exceeded our expectations.
The full year growth in the United States was driven by strong growth in core trauma and double digit growth in the upper extremities business, which offset the COVID-19 related impact on foot and ankle.
This strong result reflects excellent execution of the sales integration and the strength of the product portfolio.
Finally, our dedicated divisional business development teams continue to identify and execute on meaningful acquisitions as.
As Kevin mentioned, we recently announced our agreement to acquire Vocera and enter the fast growing digital care coordination and communication segment, we expect the Vocera acquisition to close by the end of the first quarter.
During the fourth quarter. We also finalized the acquisition of Thermodox <unk> is an innovative developer and manufacturer of fluid management solutions and will allow our endoscopy business to improve surgical visualization across the women's health segment and advance the standard of care in the urology segment.
We believe these and other acquisitions completed during the year will help us continue to drive above market growth in the future.
The overall environment remains uncertain as a result of the continuing Covid pandemic and we expect hospital staffing shortages supply constraints and significant inflationary pressures caused by raw material shortages to persist throughout 2022.
However, we believe that the underlying demand for our products remains strong and coupled with a robust order book for our capital products gives us confidence in our ability to drive market leading growth when the impacts of the pandemic subside with that I'll now turn the call over to Glenn.
Thanks, Preston today I'll focus my comments on our fourth quarter financial results and the related drivers.
Todays sales comments will be provided based on our new reporting structure and as with previous quarters. This year. All comments are in comparison to 2019 as it is a more normal baseline given the variability throughout 2020.
Our detailed financial results have been provided in today's press release.
Our organic sales growth was six 2% in the quarter. The fourth quarter included the same number of average selling days as Q4, 2019, and Q4 2020 compared to 2019, the two year impact from pricing in the quarter was unfavorable one 7% versus Q4 2020 pricing was 8%.
Unfavorable.
Foreign currency had a favorable 5% impact on sales.
For the quarter U S organic sales increased by four 7%, reflecting the impact of Covid on elective procedures hospital staffing shortages and disruptions of General Hospital operations.
This was offset by partially by strong demand for Mako in our med surge in Neurotechnology products International organic sales showed strong growth of 10, 6% Impac.
Impacted by positive sales momentum in Europe , Canada and emerging markets.
For the year organic sales growth was seven 2% with with U S organic growth of five 2% and international organic growth of 12, 9% 2021 had the same number of selling days as 2019, and one less selling day compared to 2020.
Compared to 2019, the two year price impact had an unfavorable one 5% impact on sales.
Versus full year 2020 pricing was <unk>, 8% unfavorable.
Our adjusted quarterly EPS of $2 71 increased to eight 8% from 2019, reflecting sales growth and a lower quarterly effective tax rate, partially offset by the impact of business mix increased adverse COVID-19 related pressure on sales gross.
And inflationary pressures and higher interest charges, resulting from the Wright medical acquisition or.
Our full year EPS of $9, nine which represents growth of 10% from full year 2019.
Reflects the favorable impact of sales growth operating expense discipline, right medical foreign currency and a lower effective tax rate, partially offset by increased investments in R&D as well as higher interest charges, resulting from the Wright acquisition.
Now I will provide some highlights around our segment performance in.
In the quarter med surge in neuro Tech had constant currency sales growth sales growth of 11, 8% with organic sales growth of 11, 6%, which included nine 3% of U S organic growth.
Instruments had U S organic sales growth of 10, 6% led by strong growth in their orthopedic instruments and surgical technologies businesses highlighted by growth in their power tools waste management smoke evacuation and stare shield products.
Endoscopy had U S organic sales growth of 11%, reflecting strong performances across their portfolio, including general surgery in fluorescence products and strong double digit growth of their sports medicine and communications businesses.
The medical Division had U S organic sales growth of 10, 3%, reflecting solid performances in their sage and bad businesses. During the quarter. We also saw significant growth in orders across the medical portfolio driven by very strong demand, assuming normalization of the customer environment and a reduction of certain supply constraints.
Since we expect these orders to contribute to another strong year for medical in 2022.
Our U S neurovascular business posted organic growth of seven 4%, reflecting solid growth in their hemorrhagic and aspiration project products.
The U S neuro cranial business posted organic sales growth of five 7%, which included solid growth in our Max face E N T navigation and cryotherapy products somewhat offset by continued COVID-19 impacts.
Internationally med surge in neuro Tech had organic sales growth of 18, 6%, reflecting double digit growth in the endoscopy medical neurovascular and neuro cranial businesses geographically. This included strong performances in Europe , Canada, China and in the neuro tech businesses and emerging.
<unk>.
Orthopedics and spine had constant currency sales growth of 15, 2% and an organic sales decline of <unk>, 8% with an organic decline of 2% in the U S. This reflects the impact of the slowdown in elective procedures during the quarter as a result of the delta in omicron variance of <unk>.
Covid.
Our U S knee business grew 1% organically as a reminder, during the fourth quarter of 2019, our U S knee business had very strong growth of approximately 10, 5%.
Our U S trauma and extremities extremities business grew six 7% on a comparable basis with strong growth in our plating products combined with double digit growth in our upper extremities business.
Spine declined six 6% organically in the U S, primarily resulting from COVID-19 disruptions to their business.
Other orthopedics grew 21, 5% organically in the U S, primarily reflecting continued strong demand for our Mako robotic platform, which had growth in the U S. A 43, 5%.
Internationally orthopedics and spine grew one 9% organically, which reflects the strong momentum of Mako in Japan, Korea, and emerging markets somewhat offset by the impact of volume based pricing.
In China, primarily related to our trauma business.
For the quarter, our trauma and extremities business, which includes right medical delivered four 1% constant currency growth on a comparable basis.
The Wright medical acquisition Anniversaried in November 2021, and will be part of our organic sales throughout 2022.
Now I will focus on operating highlights in the fourth quarter. Our adjusted gross margin was 65, 8% was unfavorable approximately 50 basis points from the fourth quarter of 2019 compared to the fourth quarter in 2019 gross margin was adversely impacted by business mix operated.
Operational inefficiencies due to COVID-19 , including employee absenteeism, and raw material inflation, primarily related to electronic components steel and transportation costs. We expect these adverse impacts to continue throughout 2022 with a more pronounced impact in the first half of 2022.
Adjusted R&D spending was six 4% of sales, which represents an 80 basis points increase versus the fourth quarter of 2019 and reflects our continued commitment to innovation funding and the related growth it will provide.
Our adjusted SG&A was 32, 1% of sales, which was a 20 basis point improvement as compared to the fourth quarter of 2019. This reflects continued cost discipline and fixed cost leverage offset by the ramping of certain expenses and hiring to support future growth and the dilutive impact of the Wright medical acquisition.
<unk> in.
In summary for the quarter, our adjusted operating margin was 27, 3% of sales, which is 100 basis points unfavorable to the fourth quarter of 2019.
This performance primarily resulted from adverse business mix gross margin challenges investments in R&D and the dilutive impact of acquisitions, primarily Wright medical.
Other income and expense increase as compared to fourth quarter in 2019, primarily resulting from the interest expense increases related to our debt outstanding for the funding of the Wright medical acquisition.
Our fourth quarter had an adjusted effective tax rate of 15, 2% our full year adjusted effective tax rate is 14, 9%, which was partially impacted favorably by one time items during the year for.
For 2022, we expect our full year effective tax rate to be in the range of 15% to 16%.
Focusing on the balance sheet, we ended the fourth quarter with 3 billion of cash and marketable securities and total debt of $12 5 billion for the year, we paid down $1 2 billion of debt.
Turning to cash flow, our full year cash from operations was approximately $3 3 billion.
This strong performance reflects the results of net earnings and continued focus on working capital management for.
For 2022, we anticipate that capital spending will be approximately $650 million.
Again in 2022, we do not plan to do any share buybacks given our anticipated focus on further debt reduction.
And now I will provide you 2022 full year guidance as we assess the current operating environment. We believe that there will be continued volatility caused by ongoing COVID-19 related impacts hospital staffing challenges and increasing supply chain disruptions as well as significant inflationary risks.
Given this variability we expect organic sales growth to be in the range of 6% to 8% for the full year 2022, when compared to 2021.
There are the same number of selling days in 2022 compared to 2021 consistent with the pricing environment. We experienced in previous years, we would expect continued unfavorable price reductions of approximately 1%.
If foreign exchange rates hold near current levels, we anticipate sales and EPS will be modestly unfavorable Lee impacted as compared to 2021 and this is included in our guidance.
Despite the top line and operational risks of Covid, we have good momentum in many parts of our business heading into 2022, including the continued demand for our Mako technology, a very robust order book for our capital products continued execution of our combined <unk> business and many many products.
<unk> innovations.
For the full year 2022, we do not expect to deliver our typical operating margin expansion as a result of the ongoing price escalation on supply constrained raw materials like electronic components, and rising inflationary costs on raw materials transportation and labor costs.
As a result of the latest Covid wave and the current inflationary environment. We expect gross margin performance to be negatively impacted by 50 to 100 basis points with a more pronounced impact in the first half of the year.
As we said during our analyst call in November we plan to return to our normal delivery of op margin expansion once we reach a post COVID-19 environment.
Finally for 2022, we expect adjusted net earnings per diluted share to be in the range of $9 62.
To $10 for the full year.
This wider guidance range represents the ongoing variability in the operating environment.
The upper end of our guidance range assumes the latest Covid wave subsides in Q1 with no additional major COVID-19 disruptions during the year. In addition, it assumes that the supply chain stabilizes by the end of the first half of the year.
The low end of the guidance range assumes the continued COVID-19 related volatility persists, including supply chain pressures that could impact revenues as well as costs and includes more transient spot buying and longer term supply chain pressures.
We will continue to evaluate the changing environment and will provide updates to our guidance as necessary.
And now I will open up the call for Q&A.
Yeah.
Thank you we will now begin the question answer session. If you have a question. Please register this by pressing star followed by one on your telephone keypad now.
Wished to be removed from the queue. Please press star followed by K as a reminder, callers will be limited to one question and one follow up question.
Our first question today comes from the line of Robbie Marcus from JP Morgan Ravi Your line is open.
Oh, Thank you and thanks for taking the question.
Maybe we could start just following up on guidance I think investors really.
Love to get a sense of cadence through the year, how are you thinking about.
Maybe first quarter first half relative to second half both Dod on top and bottom line. So we can calibrate correctly.
Sure.
Yeah, Ravi I think I think right now and obviously you kind of see it because of the wide range of guidance, we provided both sort of top and bottom, but but our thinking is is that the real pronounced impact that will have on top line and on gross margin will be in.
The first half of the year, we'll really feel the impacts related to that.
You know very pronounced in first quarter and lesser so in second quarter, and then we feel like things will start to stabilize by the time, we get to third quarter and fourth quarter, but we do see.
No real cost pressures, especially around our.
Our electronic components, which go in many many of our products, especially on the med surge side of the business and the buying of those products is.
Many times in a spot market, where it's an auction process and we're paying significantly higher prices than what we normally would pay related to those.
Got it.
Maybe I could just tag on to that as we think about first quarter here, we've heard other companies.
More muted kind of flattish or low single digit growth, what's the cadence improving over the back part of the arrow is that a reasonable assumption and then I'll jump back in queue. Thanks.
Yes, I mean, Robbie we're not obviously guiding for the quarter, but certainly as we think about the fourth quarter and how the fourth quarter ended with regards to the the Covid variance continuing into January . So I think you can certainly think about it that way that that there are some of those pressures from a topline standpoint that are certainly continuing it.
The beginning of the year.
Our next question comes from the line of Joanne Wuensch from sticky Joanne Your line is open.
Thank you and good evening.
Two questions. The first one has to do with U S. Mako.
Robotic placements, if I heard that correctly.
I think number should we interpret that.
Just general demand or maybe demand ahead of expectations for increasing procedure.
Now I think Joanne.
The Mako numbers, you're referring to or how were continuing to utilize mako as it becomes a bigger and bigger portion of our total knee business. I mean this is just a continuation as we think about what we've what we've talked about over the last few years. So again, we expect this to just continue to grow as we think about the utilization both on knees and what we're now seeing.
On hips as well and then also as we think about some atlas in the knee world. So we would expect that just to continue to go as we continue to place an install makos.
In different areas.
Alright, Thank you and then.
So if I'm hearing correctly.
This may be a year, where you're just sort of plow through and continue to invest even if it's a little bit rocky is that the right way to think about things.
Yes, Joanne this is Kevin that's exactly the right way to think about it we have terrific product pipelines, we have a lot of new products, we're launching this year, including our new.
Power cot, the insignia hip stem a number of foot and ankle launches.
Three launches in the upper extremities space, we have in space balloon. So a lot of new products, but we're also gearing up for 2023, we plan to have a nextgen camera next generation power tool next generation life pack and as you know these new products are really the lifeblood of our topline growth. So we are not going to slow down on.
The R&D investments of course will look at the rest of our SG&A and be and be cautious just like you've seen us be cautious over the last two years, but yes, we are going to power through but we do have a lot of tailwind. So we have a very strong order book and capital equipment, we're having a little trouble securing all the components to be able to ship all the products, but we have a healthy order book.
We have good momentum and obviously, we need to ride out the colter challenges, but yes, we are going to continue to invest for the future.
Thank you have a great day.
Our next question comes from Laurence <unk>.
From Wells Fargo your.
Your line is open.
Thanks for taking the question.
One for Glenn on margins and one on hips and knees. So on margins plan just to clarify the negative 50 to 100 basis points of gross margin impact is that the gross impact from inflation hitting the P&L.
Or is that the impact do you expect the year over year change in the gross margin.
In 'twenty two versus 21, and why are you confident the inflation will abate in the second half of the year and it won't won't linger and I have one follow up.
Yeah, Hi, Larry.
Honestly, that's the year over year impact to gross margins not the isolated necessarily inflationary impact that would include impacts from pricing pressures as well.
<unk>.
Our confidence that it'll abate I don't necessarily think that I have confidence it will abate I think it'll moderate is what will happen I mean, a lot of this pricing pressure is based on commodity pricing, which is highly driven by supply and demand.
I do believe that supply will catch up we are securing bulk purchases of demand. So I think that will help us even out.
Our utilization of it as well and so I do think by the back half of the year, we'll start to see moderation of those costs.
That's helpful and then Kevin typically.
Neither or more deferrable than hips.
At this time you know your your knee growth was much better than your hip growth.
I guess, it's unusual I don't know I'm not looking at that all the historical but usually.
We think about hips being more less deferrable. So why do you think knee growth was so much better than hip growth. This quarter for you guys. Thanks.
For us knees has been really the engine of growth within our joint replacement business. If you look over the last two or three years, the combination of Mako and some Atlas is just so powerful that we've had a disproportionate.
Growth in knees relative to the to the market in hips, we we have a gap with that hip stem.
It's really the new stem that we were just in early launch right now the full launch will be at a at Academy.
At the end of the first quarter, that's really going to solve a gap in the direct anterior procedure. So I do expect that our hip business will pick up <unk>.
You're right that technically is a little less deferrable, but the mix, it's really the product portfolio that we have now.
Which has favored knees, it's not new in this quarter, it's been going on for the last couple of years and we do expect our knee business to continue to thrive and were excited about the new hip stem and especially when it becomes compatible with Mako at the end of the first quarter.
Our next question comes from Matt <unk> from Credit Suisse. Your line is open.
Hi, good evening, thanks, so much for taking our questions.
So and one for Glenn on sort of the.
Our margin trend and thoughts about sort of earnings growth over the this year and intermediate and then a follow up for <unk>.
Maybe Kevin on an ASC.
So Glenn this year, there's a couple of questions you talked about you mentioned in your prepared remarks these issues of.
Inflationary pressure.
Im hoping I guess by the end of the year that some of this is going to.
You can be able to manage through them a little bit better but.
Taking that in the context of your longer term outlook that you'd given metro analyst day could you talk a little bit about sort of I.
Reconciling this near term.
Our outlook and expectations for earnings growth given the current environment versus.
What you had described over longer term, which was sort of an open ended long term average EPS growth obviously contemplates.
Current environment next year and year after than we're facing at this moment and then as I mentioned, just one follow up for <unk>.
For Kevin here.
On <unk>, if I could.
Okay, Yeah, Matt I think.
First of all at the Analyst day.
The guidance that we laid out was our long term financial guidance.
Guidance was specifically once we exit this kind of COVID-19 environment, which clearly in 2022, we are not in a position that we're exiting the COVID-19 environment.
Right now just based on foundational lead what what is underlying those long term financial plans in terms of what do we have lined up for growth. How do we think about M&A. How do we think about our product portfolio and new innovation I see no reason why we would change our thoughts around.
That long term growth now if you work your way down through the income statement and say Okay. How are you how are you going to Fenagle your your EPS to get to that.
Growth challenge number.
I actually think in this year's growth number if you look at the high end of our EPS, we're not far away from what were asserting is our long term challenge I do think that you know what.
Once COVID-19 abates, we will get right back on our cost improvement initiatives, especially around direct purchasing I don't see that changing at all.
Throughout Covid, we have kept up pace in our CTG initiatives still just in terms of focusing on shared service opportunities looking at indirect purchasing opportunities and so all those foundational elements are still in place and I do I do have all the confidence to think.
That once we exit Covid that will we will get right back into that cadence of delivering that.
That's helpful. That's helpful. Thanks, and then just on <unk>.
Also kind of a big part of the.
Presentation at your analyst meeting.
Then came up again today I think in your performance commentary for Q4.
Would be great to get your perspective, maybe on.
As we think about orthopedics and large joints in particular moving into that channel over time as folks have been talking about for a while.
If you could give us any sense of what.
If and when you'll be able to give us a percentage of your percentage of your business there.
How the growth there.
They are different say from.
From growth in your traditional larger centers is there any kind of color.
Over above what you gave just now on Q4 would be it would be super helpful.
Hey, Matt it's Preston so as we've talked.
About in the past, we talked about our knees.
Particular being about 5% to 10%.
<unk> of our business being in the ASC and as we've seen that continue to grow as we came through the fourth quarter. We're seeing numbers that are actually reaching closer to that 10% number. So we are seeing that shift happen I mean, it certainly is happening when we think about where patients are wanting to get procedures done.
Certainly as we think about our focus from our often standpoint, as we think about the ASC. We are seeing the shift happen across our product lines. So certainly we expect that to continue to go we've talked about that there is there is an opportunity for that to continue to grow over time, certainly there are capacity constraints as ASC are built out that will allow that continue to grow faster but that.
The shift that was already started and we don't see that slowing down anytime soon and I just like to add that outside of large joints. We also have our sports medicine business. That's within endoscopy. It grew 30% in the fourth quarter. So that's a great sign of the overall success that Stryker is having an ASC is really terrific.
Growth in our sports medicine business.
Thanks, so much.
Our next question comes from Peter Chickering from Deutsche Bank.
Please go ahead.
Hi, Good afternoon. Good afternoon, guys. Thanks for taking my questions as hospitals are struggling with the labor pressures in 2022, it could impact hospital cash flows. So are you seeing hospitals take a pause with capital purchases until you understand how the cash flows will be impacted by the labor costs.
Youre, saying that the order book is quite strong just thinking about how youre going to reprice, our order book.
Yeah, No we are not seeing that at all I mean, what we've continued to see throughout the pandemic and while some of it early on was aided by some of the cares funding and things of that nature. We are seeing strong balance sheets and we're seeing the continued need for capital products certainly as we think about the capital products at <unk>.
We supply that are either lending towards revenue generating for the hospital or towards safety and outcome for it but for the hospital. So we are we're definitely seeing a continued strength in terms of the capital demand, especially for our products I mean, our order book as we had said is is really strong heading into the year and theres a lot of confidence given some of the product.
That Kevin even outlined earlier that that's going to continue throughout the year.
Okay, Great and then a follow up modeling questions. If gross margins are going to be impacted by about 75 basis points at the midpoint is it fair to think about some 40 basis points or so of SG&A leverage during the year and R&D flat on the year just want to get a feeling for G&A versus the gross margins. Thanks, so much.
Sure.
You know as you think about operating expenses and I think I think Kevin emphasize this.
We've we've protected R&D through this entire period, we just we know that's the lifeblood. We know we have to spend there and so we have not backed away from funding those innovation initiatives.
From a people standpoint, or a technology standpoint, and that's important and we won't we won't change there on the SG&A front, we've been a little more prudent I think you've seen us.
Be smart about about our spending be smart about obviously, we're not traveling a lot. So we're not feeling that I think is 2022 unfolds, though I mean, a couple of things. Obviously, we will continue to be prudent about hiring and bringing in costs, but we will start to see those <unk>.
Costs that relate to growth.
Especially as it relates to interactions with customers hiring sales forces expanding territories those types of costs will expand specifically in selling.
Now that being said, we will continue to pressure G&A corporate type spending and things like that to try to offset some of that but that's kind of how those operating expenses will look throughout the year.
Next question comes from Frank <unk> from Jefferies. Please go ahead.
Hi, guys. Thank you for taking the question just two quick ones for me on on Mako, clearly a strong quarter Youre now 500 installs market lead I'm just wondering at this point may goes down the market for seven years.
Given the level of success and I think youre sort of seeing above 50% Mako procedures on knee is above 25 on hips.
Where does that go does that go to 80% on knees does that go to 50% on hips over the next five years and.
Has your thinking on that opportunity at all changed U S O U S.
Yes.
It's really great to see the growth in robotics, it's obviously, creating a new standard of care, it's becoming expected residents are expecting this as they enter the workforce and orthopedics and so we see the growth absolutely continuing its going to continue along the path that it's been going on.
We're going to see hips potentially hit an inflection point with our with the launch of our new stem and start to really accelerate so we're very excited about the future. We think robotics is here to stay as you've seen this happen in many other industries.
And so we do expect that the growth will continue.
In the fourth quarter, we had.
Unusually high level of of installs in competitive accounts higher than normal and we think that the fact that there are other entrants on the market is actually bringing more trialing of our systems and creating even more interest and mako than there had been previously so it's a tailwind for the for the industry and we're going to continue to ride that tailwind.
And then as it really great. Thanks, Kevin I would say, we're still we're still yes. Thank you I'll just continue on international I would say, we're still in the earlier phase of that as you've seen with other.
With other robotic technologies. It starts off here and then sort of expands around the world. We're still in early phases in Japan and in China and in Latin America, but the growth is really starting to pick up there. The interest level is very high and so I'm very bullish, but it's going to take longer it's a little slower the pathway there, but it's just as exciting in the in the international markets.
Great. Thanks for that Kevin just a quick follow up I'm just wondering if.
If you have any updates on the spine or a shoulder opportunity in robotics, and if you've put any sort of brackets around that with respect to timing or milestones at this point.
Hey, Frank expression. So at this point as we said before with regards to both of those different platforms that we certainly have active projects that are working on them. They are key priorities for our development teams, but at this point, we still do not have a timeline that we are sharing.
Our next question comes from Mike Matson from Needham <unk>, Mike. Please go ahead.
Hi, Good afternoon. This is David Jackson on for Mike Thanks for taking the questions.
My first one is just on spine just wondering if you have any sense, if you've gained or lost share in the corridor and then looking at 2022 G can keep and grow off.
2019 base and then I'll just ask my second question upfront on the foot and ankle market I think you called out some weakness there.
Just wondering if that's.
So weak market or if youre seeing anything on the competitive front. Thanks, so much.
Yes, So let me let me address your spine question first I think as we've said in general throughout the pandemic. It's just very hard to get a read on how share changes are happening given some of the COVID-19 impacts and how they impact different things regionally also just in terms of where we are in the reporting cycle. It's very early.
With spine, just like we saw with with hips and knees. It was impacted from a COVID-19 perspective throughout the quarter early on as we try to recover from from Delta and then with Omicron coming in later on in the back part of the quarter, so not not easy to say, where everybody's going to shake out from that standpoint, but certainly outside.
Of Covid outside of the staffing issues that we talked about as well we are pleased in general with our with our product portfolio, including enabling technologies that we have in the spine area and as we come back from from Covid and that's Covid Abates, we would expect the growth to uptick in that area and certainly as we do with all of our <unk>.
Expect to see growth.
On that business as we talk about year over year.
With regards to foot and ankle foot and ankle the market is still a very strong market. It's one that we're very happy about and to be in but unlike other products within the trauma or even upper extremities foot and ankle was much more impacted from a COVID-19 perspective during the quarter and we've seen that throughout the year, but certainly as COVID-19 abates in that area as well, we would expect that growth to really.
Drive there and Kevin mentioned, we have several product launches that are going to be happening in that space as well that we're very happy about so we definitely look for growth certainly as COVID-19 is starting to abate a bit to really see the growth takeoff in that area yes.
Put a fine point on the foot and ankle. So it's really the forefoot procedures that are a little bit more elective and that's where a number of our launches will happen at the total ankle replacement was actually terrific in.
In 2021 really great growth and we're going to continue to have very strong growth in total ankle replacement, it's really getting the forefoot procedures to to come back to the office and as that grows we will continue to grow and a lot of our launches are our mis products specifically for forefront.
Great. Thank you.
Okay.
Our next question comes from Chris Pasquale from Guggenheim Securities. Chris Your line is open.
Thanks.
One question high level for you, Kevin and then one specific one on neurovascular or so.
Given how interested you guys are on the hospital I'm curious are you thinking about the staffing challenges that were hearing about around the health care complex.
You hear some assumptions around when COVID-19 and supply chain issues, maybe when do you think we might put the staffing piece behind us.
Yes, so just in terms of staffing this is Preston it just similar to some of these other other headwinds that we talked about the staffing challenges is a real one that certainly it seems to be much more pronounced in periods of high Covid infection rates, obviously is as those those nurses are either doing.
Other things are in fact impacted themselves from a COVID-19 standpoint. So we certainly do expect that the staffing challenge to remain throughout the rest of this year, but we are seeing hospitals try to find ways to deal with it whether it's looking at traveling nurses are adjusting wages are even adjusting how their scheduling.
Get to get through that so while it will be a bit of a headwind. We certainly think that it's something that we will be able to work through and adds procedures return, we certainly expect to get the procedural volumes back to the levels that we would want them to be.
Okay. So you don't see that as an impediment to a bounce back in activity.
Good receipts.
No.
Okay, and then just quickly on neurovascular, there's competitor recall in the flow devoted segment during <unk>.
Curious how much you think that benefited you in if you're being able to take advantage of that to get into some new accounts.
Our flow diverting stent business has been really a strength for us and it's not really so much related to competitive activities just getting surgeons trained on the product as you know the evolve stent is newer than many other markets. It's a newer launch and we still haven't launched it.
In all countries around the world, but.
But we're pretty excited about the product and it's been growing at a pretty healthy rate and there was no I would say no change or no inflection point related to competitive activity.
Thanks.
Our next question is from Matthew O'brien from Piper Sandler Matthew the floor is yours.
Afternoon. Thanks for taking my questions I guess, just bigger picture question for starters. As you know you kind of said at the analyst day here about an 8% top line grower and you're guiding now fixed.
Seven in the midpoint.
100 basis points 170 million Bucks roughly I'm just wondering this year. If that's really all just conservativism around the impact of Covid or if there's just some supply issues that are going to cause you to just have to back order a bunch of products and Thats. Why you are taking it kind of down about 100 basis points versus where I think we had all kind of.
Specced at the topline guidance for the year and then I do have one follow up.
Yeah, it's about I think as we as we look at 2022 and as we enter the year similar to what we've seen in 2021, I mean, theres still continues to be a lot of variability with just COVID-19 and so if we think about how we've entered this year with with Covid being pretty high in some places and while.
This variance seems to happen very fast and it seem to be peaking in some areas, which is encouraging but we can't predict where the next wave is and what might happen from a next wave standpoint. So there's a lot of variability just as we think about Covid and then we add on top of that some of the challenges and the headwinds from a supply chain perspective, and it's not to say that Theres a big.
<unk> is a supply chain issues that we have but just in general if we think about electronics and components and some of the challenges just with supply across all industries that certainly something that's out there in front of us as well. So there's just a lot of variability as we think about this year in terms of some of those those topline aspects that is one of the reasons why we have that wider.
<unk> and maybe a little bit lower than what some others were expecting that being said as Kevin outlined there are there are some really really good tailwind that we do have as we think about entering this year, whether it be our mako installation base and how that's going to that's going to portray into future sales. There also the new product launches that he's outlined of course, we have the most.
Arrow deal that we're hoping to close this quarter as well so there's a lot of positive momentum that we have across our businesses that we're going to take into this year and so we're really pleased with that but just balancing that with some of those headwinds that I outlined as well.
Okay, but you are assuming another wave then Preston just to be clear on that in the guidance.
Yes, Glenn outlined in the guidance that he went through we do have some some some of that assumed is in that spread that we have.
Okay. Thanks for that and then as a follow up Kevin you know the commentary about about taking competitive share are placing more mako accounts and be competitive.
<unk>.
Really caught my attention.
What I'm wondering is if there was just a bunch of Trialing that went on in Q2 Q3, you just had a massive Q.
Q4 quarter in terms of system placements and sales.
Are those is it primarily in accounts that have a competitive robot or are launching one right now where you saw the majority of those incremental system placements here in Q4.
I don't really get into that level of detail what I. What I'd. Just say is the mix we'd be we used to report the mix is roughly $50 to 60% in competitive accounts. It was well north of that in the fourth quarter now I don't know if its just a one quarter issue or whether that will continue there were a lot of accounts that were kind of waiting for other <unk>.
Offerings to appear on the market.
Once those offerings appeared then than they would have trials and in most cases. It was in some cases I know it was the first robot in other cases. It may have been the second to the third robot in those accounts I don't have exactly that level of information, but but it was higher than we've seen in the past.
Can't say I was expecting it it was higher than I expected.
But I am expecting Mako to continue to grow and that's not new it's just the mix was more more competitive than we've seen previously and now we'll see if that continues going forward, but the order book for Mako as well as for the Med search capital is strong at the end of the year. So that that tells us that momentum will continue into 2022.
Our next question is from Steven Lichtman from Oppenheimer.
Stephen Please go ahead.
Thank you Hi, Cai.
Just one on the supply disruptions, particularly around electronics I apologize if I missed this but is the impact really on medical.
Solely or where does it potentially have an impact on your ability in other areas, particularly to keep up with demand in makeup.
So so the impact is primarily impacting our medical business.
But there are some smaller impacts that we're seeing on some of the other med surge related businesses as we think about Mako as we entered into 2022 and the expected demand that we have for Mako will feel comfortable where we are in terms of supply and any impacts on Mako are minimized at this point.
Okay.
Okay. Thanks, Preston and then.
You guys mentioned I think versus 2019 international performance was better than U S. On an organic basis as you look into 'twenty, two and your guidance do you assume.
Constant currency growth for international which will continue to be ahead of the U S or is it more balanced how.
How are you thinking overall about your international business versus U S. As you look into the sphere.
Yes, while we don't we don't provide guidance at that level.
We don't expect the momentum that we've generated throughout this year to slow down as we think about our international business and quite frankly as Kevin pointed out in the past. This is something that we've been building towards as we think about our focus on international markets and so there's no reason to believe that that will slow down.
Okay. Thanks, guys.
Our next question comes from the line of Matt Taylor from UBS.
Please go ahead.
Hi, Thank you for taking the questions guys.
Just had two quick ones one is.
On the supply chain assumptions.
I didn't detect and your comments that you were saying supply chain, specifically was impacting <unk>.
Revenue is at all a cost impact or is there actually some product that you are not able to get out because you can't get componentry and the like.
Yes, so I think it's a bit of a mixed bag. So theres certainly are inflationary pressures that we're feeling as a result of the supply chain and just constraints on certain materials like electronics, but that is also in some cases, leading to some delays in terms of getting some products out. So we do have.
A bit of a mix as we think about supply and certainly the procurement team. The direct procurement team is working on actively securing as much as possible, but as Glenn mentioned, sometimes what that means is going outside of our contracts into spot buys and that's what's generating some of the larger inflationary impacts as we think about that.
The guidance that we gave obviously our goal is to protect our customer needs.
Best as possible as we go through this but there is certainly has an impact on both the top and the inflationary piece of that Glenn outlined as well.
Okay.
That's helpful.
And then just one other follow up so it's encouraging to see the strong capital trends, especially in Mako I guess I was wondering if you are seeing any places where capital purchasing has been weak and I'm thinking, especially beds. I think some investors are concerned that maybe beds were pulled forward because of the pandemic. So we'd love it.
Comments on on that pluses and minuses in capital spending that you are seeing.
Yeah.
Actually our capital order book is strong across the board and in particular bad set of terrific.
Finish at the end of the year in terms of orders a huge number of orders for our new procured bed.
And it's a new launch it takes some time to go through the Trialing process, but.
We're extremely excited about our bed business I think Glenn highlighted that in his in his remarks, but the orders for our beds are very high very strong and we now have to build all the beds and make sure. We have all the parts to be able to ship them all but we're very excited about the momentum. So it's broad based it's in our emergency care area. It's in Mako, It's embeds it's in.
The instruments Division the Endoscopy division of capital across the board is strong.
Good to hear thanks, Kevin.
Our next question comes from Joshua Jennings from Cowen Joshua Your line is open.
Hi, good evening, Thanks, a lot.
Kevin was hoping two pipeline questions.
You made a big.
Winning bet on <unk>.
Pairing robotics with transplant knee I was wondering if you had any.
Change in strategy on the implant side, if anything on the manufacturing front or is it still cost prohibitive for three D printing of.
With an implant and then how do you see the knee implants evolving from here.
Under Strykers roof, and then the second question is just on robotics.
The pipeline with the spine and shoulder are there any other areas, particularly one other question on neurovascular, where you see robotics.
Our killer App and in neurovascular any other.
This segments for Stryker, Thanks, a lot.
Okay, great well, thanks, we'd like to sort of wait until we have something proven before we kind of talk about it we are looking at famers in particular cobalt chrome at different manufacturing processes for those and once we're ready to talk about that we'll share that we have automated the beating that's used for the some atlas.
The femur, we are constantly looking at different surface materials, but not ready to announce anything yet I would say that the actual design of triathlon, we're really delighted with as you saw we came out with three D printing tibial base plate three D printed patella to enable the some atlas solution, but not a fundamental change to the design we've come up we came.
With one millimeter inserts and we've made other changes in I'll say modifications to make it easier to have a more personalized knee solution, but not a fundamental redesign site. So you wouldn't shouldn't be expecting a some kind of fundamental new design, but but there will be things that we're working on that we'll be able to share with.
You on the knee side certainly on the hip side, we have a new implant that we've talked about already earlier earlier on that's fit for purpose for direct anterior we're very excited about that we have a fab fabulous <unk> printed hip Cup, but we do have instances, where many surgeons are using our cup, but they're using a competitive stem and with this step will be able.
To convert all of their business. So that's very exciting for us, but on the knee side I wouldn't expect anything major new be up we are working on things when we're ready, we'll we'll be able to share that as it relates to future applications.
Applications.
As you know robotics are challenging where our main focus is really shoulder and spine right. Now there are some skunk works projects looking at some other areas, but again I don't want to start talking about those yet because they need to get more proven before we're ready to talk about it in the areas of it.
Spine and shoulder. It's a matter of time, we are going to have probiotic applications.
But again, we don't have a timeline right now, but we have projects that are working on teams that are working on it and making very good progress.
Thanks, a lot Kevin.
Our next question comes from Sharon sang from RBC. Your line is open.
Great. Thank you for squeezing me in just a couple of quick ones from me Firstly.
Are you assuming specifically for margin expansion in the first half when the full year.
And then on China of Edp, do you expect trauma and spine to be included.
Yes.
And then just lastly on ESP.
The major theme that we're hearing from hospital companies, including from ATM. This morning that ortho is the latest category. That's in transition from inpatient to outpatient and I think Kevin previously you'd indicated about but do you expect about 15%.
Procedures to transition and I think you gave a timeline as well can you provide us with an update there. Thank you for taking my questions.
Okay ill. This is Glenn I'll take the first one on margin expansions, we specifically did not really guide on margin expansion, just because theres a lot of volatility.
I think we were trying to provide you with some good color around some of the pressures we were feeling especially on gross margin. We do expect that to be a little more pronounced in the first half of the year.
Especially as compared to prior year and that's that's the extent of the guidance that we'll provide on on margin.
Then I'll hand, it Preston so, yes shot and just back to your ASC question.
As I as I talked about before we do expect that that transition to continue in terms of a timeline I mean, I think a lot of it just going to depend on how capacity is built and how we're able to continue to transition.
Patients and surgeons to that to that setting certainly as we think about the ASC offense that we've created we are here and actually helping to make that transition happen.
So we certainly would expect our large joints to continue to make that shift as well and I apologize I forgot. Your second question that you had in there.
Yeah.
Oh she's in others.
Uh huh.
And where we can go to the next the next question.
Okay.
Next question comes from.
Jason Bedford of Raymond James Jason. Please go ahead.
Good afternoon, and thanks for taking the questions just a couple of quick ones first.
It's a little granular, but in those geographies that have seen COVID-19 cases that have rolled over have you seen a pickup in volume growth.
So I would say that it's it's it's spotty I mean, I think just like just like how we've thought about COVID-19 throughout the last 24 months or so you will as Covid cases start to decline as hospitals are able to get capacity up and running we know they will and so certainly as that.
It happens with this wave we will start to see procedures picking back up in those areas as well, but it does vary by market. So in Australia, we definitely saw a big pick up as soon as they resume elected to pick up is pretty Swift I would say the UK is similar but then in other markets, whether it's Japan or whether it's southern Europe .
It's a little bit more gradual than the.
Increased so there isn't one answer but we do know is these patients are going to need their procedures.
The pace of the recovery honestly is quite difficult.
To generalize because it does behave differently by country.
We are expecting that there will be a pickup and we look forward to that.
Okay, that's fair.
Secondly on the right integration you guys have done a great job here in the U S. Just wondering on international how much work is left from the integration and should we expect to see a pickup in international extremities growth in 'twenty two.
Yes, we are we continue to work through the international integration I would say that as I mentioned in my prepared remarks, we continue to make progress.
In that space and as we do certainly we should continue to see a pickup internationally as well.
It's the international market has certainly lagged the U S. We had distributor contracts and arrangements that we had to to get out of and so we always plan for that to be a little later.
And so we didn't have any debt.
Results internationally that we did in the U S, but that wasn't a surprise to us and you will see a gradual pickup in the international markets were quite excited because obviously stryker has a larger footprint internationally.
And really a better home for the Wright medical products and that should be an engine of growth in the years ahead.
Our next question comes from Jeff Junction from Beth Jeff Your line is open.
Thank you good afternoon, most of my questions have been answered, but Glenn totally respect that you haven't guided to the operating margin line, but I think when we connect the dots between your revenue guidance gross margin guidance. Your EPS guidance I mean simple math, it's kind of get me it could be up operating margin could be up a very little bit to down 30, 40 basis points. Just directionally is my math kind of.
Right, there or should I read rethink some of my math. Thanks.
Yeah, Hi, Jeff.
Yes, I think your math is pretty obvious I think if you take all the pieces. So I imagine that your model probably will reflect that.
Okay.
Our next question comes from Danielle <unk> from SBB Leerink Daniel Your line is open.
Thanks, Hey, guys. Good afternoon, and thank you so much for squeezing me in here I just have one question and sorry to belabor the whole COVID-19 recovery et cetera.
But.
Just curious about how to think about this recovery post surge or wave.
Wave versus past recoveries im thinking of.
Q I'm, sorry, Q2 of last year, and even really Q2 of 2020. When thanks first opened up you really saw Paula, but it feels like because of the hospital staffing shortages this might be a little bit more linear in nature I know, it's probably very difficult.
Yes.
Granular here, but just curious about what youre hearing how you guys are thinking about that.
The recovery curve itself. Thanks, so much.
Yes, Daniel Youre right. Its a it is it is a difficult thing to predict and certainly as we go back to 2020, I think you saw that big bolus pickup if you remember how far down it was at the end of Q2, and we certainly have not seen that same level of drop off with these the subsequent waves, so I think linear and <unk>.
Gradual is probably the way to think about it.
Muted a little bit by some of the staffing pieces, but I would say linear and gradual as we as we continue to come out of this recovery.
Okay. That's it for me thanks.
And our last question today comes from drew Ranieri from Morgan Stanley .
Please proceed with your question.
Hi, Thanks for taking the question maybe one for Glen just on the cash flow for 2022.
Can you provide any type of framework for cash flow from operations I know I think you mentioned capex, but just curious what youre seeing.
Are you expecting any type of.
Working capital improvements Youre kind of working on in 2022.
Yes, no great question I think as we think about cash flow, we've really come a long way, especially from where we were in 2019, and especially a lot of the muscle and discipline that we've built around working capital management. So all of that will roll into this year 2022 and in the <unk>.
Benefits associated with that you know I think there will be some spending that was somewhat muted in deferred in the past, especially around capex and so you know right now we're estimating approximately $650 million of Capex.
That being said, we generally target that 70% to 80% free cash flow conversion number I know, we've beaten that over the last couple of years, but we've also seen reduced spending in a lot of areas that I think will start to pick up, especially as we exit this and kind of try to get to a more normal operating environment.
I think that that's probably what we're targeting there could be some variability depending on how COVID-19 .
Covid plays out through the year.
And Kevin just one for you you kind of touched on this it can be a launch and your expectation that's going to drive more makeup utilization over time, but near term maybe in 2022 as you are launching this double AOS.
Would you expect to get to up to 30% utilization for hips on Mako.
Or is there a kind of a stretch goal that you have in mind for the year. Thank you.
Yeah actually for this year I'm more concerned really with just getting great uptake with the stem, whether it's with Mako or without Mako, we've already done a limited launch feedback has been incredibly positive from surgeons in terms of the broaching of the implant the size options the experience that they're having is.
It's really terrific. So in this first year that the Mako utilization is is less important to me than really satisfying the surgeons need for this product and really getting to D. E and I expect the Mako number will continue to rise it could hit 30%, absolutely, but but more importantly is really having success with the stem both manually.
Well as as with Mako.
And a full launch we expect will be in the second quarter. So we'll really start to see a bigger impact in the second half of the year there'll.
There will be some impact in the first half, but much more towards the second half of the year.
Yeah.
There are no further questions at this time I will now turn the call back to Mr. Kevin Lobo for any closing remarks.
So thank you all for joining our call and for all of your questions. As you can see we had a very strong finish to 2021, we are working through the challenging environment right now and you can see that the company is well positioned to fight through it.
We are going to continue to invest for the future and make sure that as things improve in the environment that we're poised to capitalize on that and we look forward to sharing our first quarter results with you in April Thank you.
Thank you. This concludes today's conference. Thank you for participating you may now disconnect your line.
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