Q3 2022 Stryker Corp Earnings Call
I believe we are making good progress with the development of our spine and shoulder applications for makeup.
We have stopped the card and spine robotic project to focus all our energies on Mako and expect that the Mako spine and shoulder launches will occur in a similar timeframe.
Also during the quarter, we signed an agreement to purchase Cerus Endovascular technique.
A technology leader in the hemorrhagic segment.
This deal is pending customary closing conditions.
We remain confident in the outlook of our business and expect to continue to deliver sales growth at the high end of Med Tech, which is reflected in our narrowing our full year organic sales growth to the higher end of our prior range now eight 5% to 9%.
However, a worsening foreign currency and continued inflationary pressures have caused us to lower our full year adjusted EPS range to $9 15 to $9 25 per share.
Overall, our team has shown good resiliency and I am pleased that employee engagement remains very high.
We continue to be recognized across many countries professions gender and age groups as a great place to work most recently as one of the world's best workplaces by Fortune.
As we look ahead to 2023, we feel optimistic about growth with high customer demand.
New product launches.
Though the inflationary pressures and supply chain challenges, we will continue to impact next year.
Our strong growth outlook combined with our pricing and cost actions will position us well to return to strong earnings growth.
I will now turn the call over to Jason.
Thanks, Kevin My comments today will focus on providing an update on the current environment, including the procedural geographic and capital trends during the quarter.
In addition, I'll provide an update on the integration progress of the <unk> business.
Procedural volumes continue to recover throughout the third quarter in most countries and we are beginning to reach normalized levels across most of our business.
While we are seeing volumes recover hospital staffing pressures have continued to impact the ability to reduce procedural backlog in a meaningful way.
These challenges will likely resolve gradually and we continue to expect this will be a moderate tailwind into next year.
Geographically procedural volumes steadily improved during the quarter in the United States, Europe , and Latin America.
Parts of Asia Pacific have continued to be more volatile due to ongoing COVID-19 related impacts.
Demand for our capital products remained very strong in the quarter as seen from the double digit growth of our medical division.
However, we did realize some installation delays as well as hospital scheduling challenges.
Specific to Mako installations for the quarter were soft as we realized delays stemming from variability in the hospital environment.
However, our order book remains strong and we expect a good fourth quarter for makeup we.
We will update you on our key metrics in January .
Now to our key integration activities.
We continue to be pleased with our Vocera integration progress and remain excited about the strong growth potential of this platform technology.
However in Q3, we elected to delay some installations shifting from on Prem servers to our cloud solution with certain customers.
Also as we do with all acquisitions, we are shifting the legacy sales force to the Stryker model, which has caused some disruption there.
These delays resulted in revenues that were essentially flat to Q3 2021.
However, the order pipeline remains strong and customer retention remains very high at 99% for software renewals.
We expect these processes to continue into Q1 of next year, after which we will be positioned to drive robust sales growth.
In summary, while the macroeconomic environment remains dynamic procedural volumes are improving and the underlying demand for our products remained strong which gives us confidence in our ability to continue to drive strong revenue growth with that I will turn the call over to Glenn.
Thanks, Jason today, I will focus my comments on our third quarter financial results and the related drivers our detailed financial results have been provided in today's press release.
Our organic sales growth was nine 9% in the quarter.
Third quarter's average selling days were in line with 2021, the impact from pricing in the quarter was unfavorable <unk>, 7%.
We have started to see the positive impact of pricing initiatives, particularly in our U S med surge businesses, which all had positive pricing for the quarter.
Foreign currency had a three 7% unfavorable impact on sales.
We continue to experience supply chain disruptions that have increased costs and lead to inconsistent product availability.
This is especially impacting the shipping and delivery timelines related to capital products and our med search businesses.
Nevertheless, our capital order book continues to be very robust demand from our customers remained strong.
In the quarter U S organic sales growth was nine 2%.
International organic sales growth was 11, 8% impacted by positive sales momentum across most of our international markets, specifically emerging markets, Canada, Japan, and Europe somewhat offset by lingering COVID-19 impacts in other Asia Pac countries.
Our adjusted EPS of $2 12 in the quarter was down eight.
From 2021, due primarily to the impact of foreign currency exchange translation of eight.
Additionally, higher costs associated with gross margin challenges were offset by the benefit from higher sales and cost discipline.
Now I'll provide some highlights around our segment performance.
In the quarter med surge in Neurotechnology had constant currency sales growth of 13, 5% with organic sales growth of 10, 8%, which included nine 6% of U S organic growth and 14, 4% of international organic growth.
Instruments had U S organic sales growth of two 2% led by our surgical technology business from a product perspective sales growth was highlighted by growth in smoke evacuation and spare ratio <unk>.
During the quarter instruments experienced supply chain challenges primarily related to its capital products.
Endoscopy had U S organic sales growth of 14% highlighted by double digit growth in both the core endoscopy and sports medicine businesses.
Medical had U S organic sales growth of 13, 7% driven by growth in our stage in acute care businesses fueled by for acuity and prime structure demand. As previously noted medical continues to experience supply chain challenges that primarily impact emergency care products.
Our U S neurovascular business had organic an organic decline of 2% driven by a strong double double digit comparable in 2021 disruptions due to hospital staffing shortages and slower clinic volumes as well as competitive pressures.
The U S. Neuro cranial business had organic sales growth of 12, 7%, which included solid growth in our Mac space and neuro products.
Internationally message in Neurotechnology had organic sales growth of 14, 4%, reflecting double digit growth in all businesses geographically. This included strong performances in Japan, China and other emerging markets.
Orthopedics and spine had both constant currency and organic sales growth of eight 7%, which included organic growth of eight 7% in the U S and eight 9% internationally.
This reflects the impact of our strong international growth and solid growth in our hip knee and trauma and extremities businesses.
Our U S hip business grew 12, 4% organically, reflecting strong primary hip growth fueled by the recent launch of our insignia hip stem and continued procedural growth our U S knee business grew 14% organically, reflecting our market leading position and robotic assisted knee procedures.
Our U S trauma and extremities business grew 10, 4% organically with strong performances across all four businesses led by double digit growth in upper extremities highlighted by our new products perform and blueprint.
Our U S spine business sales grew 2% from solid performance in our enabling technology business somewhat offset by the impact of lower surgery volumes and the competitive environment.
Our U S. Other ortho declined organically by 11, 2%, primarily driven by the impact of the aforementioned delays and Mako installations in the quarter.
Internationally, orthopedics and spine grew eight 9% organically, which reflects the strong momentum in Europe as procedural volumes improve as well as strong performances in Japan, Canada, and India somewhat offset by Covid related volatility in Australia.
Now I will focus on the operating highlights in the third quarter.
Our adjusted gross margin of 62, 6% was unfavorable approximately 370 basis points from the third quarter of 2021, reflecting the impact of the purchases of electronic components at premium prices and other inflationary pressures primarily related to labor steel and transportation costs.
As well as inefficiencies from supply chain disruption and the unfavorable impact of price and foreign exchange on sales.
Sequentially from Q2, 2022 gross margin was 70 basis points unfavorable.
This included the impact from unfavorable business mix higher than expected inflationary pressures, including premium pricing and operational inefficiencies.
We expect these adverse impacts to continue throughout the remainder of the year and into 2023.
For the full year 2022, we now expect adjusted gross margin compared to 2021 to be adversely impacted by approximately 250 basis points.
Adjusted R&D spending was seven 1% of sales, which represents a 40 basis points increase from 2021.
This reflects our continued commitment to funding innovation and the related future growth that will provide.
Our adjusted SG&A was 33, 1% of sales, which was 100 basis points lower than 2021.
This reflects the impact of an increased focus on discretionary cost control and head count discipline.
In summary for the quarter, our adjusted operating margin was 22, 3% of sales, which was approximately 310 basis points unfavorable to the third quarter of 2021.
This performance is primarily driven by the aforementioned gross margin challenges in the net negative impact, resulting from foreign currency exchange translation.
What offset by cost discipline.
Adjusted other income and expense decreased from 2021, primarily resulting from lower interest expense and favorable interest income, we anticipate Q4 <unk> to be approximately $70 million.
Our third quarter had an adjusted effective tax rate of 14, 5%, reflecting the impact of geographic mix and certain discrete tax items. We now expect our full year adjusted effective tax rate to be at the low end of our previously communicated range of 14, 5% to 15%, which is slightly lower than 2020.
One.
Focusing on the balance sheet, we ended the third quarter with $1 5 billion of cash and marketable securities and total debt of $12 8 billion approximately $250 million of term loan debt was paid down in the quarter, which brings our year to date payments to $500 million.
Turning to cash flow our year to date cash from operations is $1 6 billion. This performance reflects the results of net earnings partially offset by the impact of higher costs for certain electronic components pre buying of certain other critical raw material inventory and seasonal inventory increases.
Considering our third quarter results, our strong order book for capital equipment, and the sales momentum in our implant and capital businesses. We now expect full year 2022 organic sales growth to be in the range of eight 5% to 9%.
If foreign currency exchange rates hold near current levels, we now expect.
Net sales in the full year to be adversely impacted by approximately 4% and.
And adjusted net earnings per diluted share to be adversely impacted by approximately 35 to 40 for the full year, which is included in our revised earnings guidance range.
Based on continuing inflationary and supply chain pressures.
Balanced with our strong sales and additional cost reduction actions and most significantly the anticipated future impact of foreign currency. We now expect adjusted earnings per share to be in the range of $9 15 to nine 5% and now I will open the call up for Q&A.
Thank you.
I would like to ask a question. Please press star followed by one on your telephone keypad.
Any reason you would like Tim has a question. Please press star followed by Tim.
To ask a question press Star one as a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question.
We have a pause here briefly as questions are registered.
Our first question comes from the line of Robbie Marcus with Jpmorgan Chase. Your line is now open.
Thank you and congrats on a really nice top line here.
That said I do want to ask my first question on operating margins, both for third quarter and fourth quarter.
It came in a lot lower it looks like half place for current say I think.
What I'd like to know is how much of what we side to the negative was transient and third quarter and what's driving the strong sequential improvement into fourth quarter here. Thanks.
Hey, Ravi this is Glenn good questions.
As we looked at the third quarter and the impact in what.
What changed from Q2, specifically, we just what we saw was we saw that our visibility to supply that approved.
And that we were seeing sort of moderate sort of improvement, but the rate of improvement relative to the cost was not improving at that kind of outlook. So we continued to see higher than expected premium costs. We saw other inflation across almost all categories, but as I noted most noticeably.
Labor metals transportation.
And then all of that and that sort of variability of supply chain really drove.
Just inefficiencies in our manufacturing process and so that we have lots of stops and starts which as you know just drives up more cost so I think.
If I think about it whats transit, what's not I think in Q4.
We have good visibility to supply and feel confident enough to raise our sales guidance, which is what we did and so we will feel that in Q4 I still think we're going to see a little bit of this fluid environment, where we will continue to experience some higher costs and I would tell you that.
Once we get our hands around sort of one electronic component issue. Then we will be contacted from N minus two vendor about another issue and so we're feeling that sort of through as we're managing through sort of our supply chain issues.
Great and.
As we go into 2023.
I think everybody is starting to focus.
I don't think theres much issue with the top line width.
99% in the quarter eight five to nine for the year that looks really good I think people feel comfortable into next year, whereas where theres questions is down the P&L and on EPS.
Kevin You mentioned the comment about strong EPS growth next year I see the street.
On my numbers looks north of 50 basis points margin expansion next year, which might be a little high given.
The trends were seeing here, we'd love to hear if you have any initial comments on thoughts on 2023, and particularly what that strong EPS growth means.
Yes, Thanks, Ravi Hey, no we're going to give specific guidance in January as we always do but I did make that comment in my opening remarks to signal that this year is an aberration.
We'll get back to strong earnings, which does absolutely implied margin expansion in 2023.
But specifics we'll get to you in January .
Yes.
Thank you. Our next question comes from the line Spiegel with Wells Fargo.
Your line is now open.
Good afternoon. Thanks, so much for taking the question I wanted to ask first about the supply shortages.
Kevin.
I don't know if you are willing to comment on how much you think they impacted too.
How much you expect to be impacted in Q4.
<unk> sales do you expect to get back over time, and I had one follow up.
Yes, Larry I think.
Not to give specific guidance on our numbers relative to this disruptions, but suffice to say that.
On some products, we are very hand to mouth in terms of how we're getting componentry to complete those products and ship them to customers.
In sum, we have a little bit better visibility.
I would tell you that with our order book.
Backlog at an all time high.
We are seeing pretty significant significant disruptions across our capital businesses.
We're very focused on getting product to customers, we know thats important.
And we are working hard to make sure that as we can secure supply that we worked around the clock to get those products finished and get them out to customers.
Yes, Larry what I'd add is our problems are in the midst search side of our business and.
And on the Med search side of our business, we're not going to lose sales. So if we have problems in the implant side those.
Those sales would be lost to competitors in this case customers are waiting.
The products aren't urgent we do have a plan to get these products to our customers.
Medical's numbers, which were pretty impressive a 13 plus percent organic would have been materially higher.
Because of the emergency care demand and stay with instruments. Those were the two divisions that had the most impact frankly, we have a lot of nicholas issues across our portfolio, but those two divisions were severely impacted in Q3, Youll see recovery some recovery in Q4 and into next year, but I really don't expect to lose.
Any of those sales, which gives me a lot of confidence going into next year that our sales are positive sales trajectory will continue.
That's helpful and then maybe a little bit more color on the softness with Mako this quarter.
How confident are you in the rebound in Q4 and Glenn I know the other line is not just mako, but when can we expect to see that line turn positive. Thanks, so much.
Hey, Larry it's Jason I'll start here and talk a little bit about Mako and then Glenn if you want to comment on the other piece feel free but.
As it relates to Mako like I said in my prepared remarks, the orders were soft, but if you look at the order pipeline is very robust and we continue to be.
I'll say the.
Robotic assisted choice in the marketplace and so we feel good about Q4 and like I said in my prepared remarks, we expect a strong quarter.
Yes, the only thing I'd add is.
There are there are.
A couple of products in that line item or other but yes, you're right, that's where mako is.
I don't really want to guide you on Q4, and I think sequentially, we will definitely see improvement, but in terms of women Lucy full positivity, we'll talk about that in January yes, just one last comment to add what I'm really encouraged by us.
Quarter after quarter after quarter, we're seeing.
The knee Mako as a percent of our total needs to go up.
As a percent of Mako hips as a percent of total hips fill up.
So that was a percentage of total knees go up in some Atlas tends to correlate very well with Mako. So all of those metrics are in the right direction, Yes, we've had some more delays in getting these.
Robots installed and sold to our customers, but Q4 will be good and we will continue our positive trajectory.
Okay.
Okay.
Thank you.
As a reminder.
You have please remember to limit yourself to one question and one follow up. Thank you. Our next question comes from the line of Vijay Kumar with Evercore ISI.
Your line is now open.
Okay.
Hey, guys congrats and good.
<unk> <unk> per share.
Kevin maybe my.
First question here.
Not 'twenty three I guess.
Did I hear you guys say labor situation improves so that's a big tailwind in 'twenty three.
How should we think about this capital was the supply chain impact those dynamics, but it's true.
<unk> order book was in supply chain dynamics, how does that impact <unk>.
Any new products that we should be thinking off again not asking for specific.
Guidance.
Maybe some qualitative comments on these variables.
Okay sure.
I'll stay of the land of qualitative P. J at this time of the year, but first we are seeing a tailwind and procedural demand. So procedures are recovering around the world a little slower in the Asia Pac regions, but given what happened with Covid.
That tailwind as you saw with very good growth.
Our hip and knee business that will continue into fourth quarter, and I think a pretty modest or moderate tailwind.
Throughout 2023, and maybe even into 2024, so thats one positive tailwind we have a number of new products. We're launching system nine camera in the early part of the year, sorry system manpower tool in the early part of the year 70 to 80 camera around the middle of the year and then we've got a defibrillator, which is a little less certain on timing because it's the PMA.
Product, but the life back.
Perhaps towards the latter part of the year, but those are big massive important products and you know what happens when we launch those products I kind of call. It a super cycle within med surge of new product launches, we had the insignia hip stem, which is less than 50% of the way launched that.
These implant launches take multiple years to get all the sets out into the field that tremendous momentum you saw in our hip numbers that look good the last couple of quarters relative to competition because of the insignia spend and that will just continue to gain steam going forward.
So those are a number of the positive is what I'd say on the order book side.
We know we have this big big backlog of unfilled orders that customers are willing to wait for in many cases, especially in emerging care.
Orders are not being canceled that gives us a lot of confidence that the demand is there. We just have to make sure we can get the supply.
The customers.
We've been securing chips, we've been securing different products, but as Glenn mentioned, it's it's.
Ben.
Hidden mist, along sometimes its just a resin sometimes it's a small component.
So theres been spotty.
Getting better, but it's kind of getting better slowly. So we'll fight our way through that probably in the first half of next year, but tremendous demand in the absence of new products and those new products will just sort of give us extra momentum going into next year.
I just picked a few but.
Alright for some of my divisions I didn't mention that.
Yes.
Solar the foot and ankle and so theres a lot of other ones, but those are sort of the.
Some of the big ones.
That's helpful.
Color, Kevin Glenn maybe one for you at current FX rates, how should we think about EPS impact for 2016, and the 250 basis points of gross margin impact what is being capitalized.
What percentage of your fab.
In.
That to 50 basis points is being capitalized on the balance sheet.
Okay VJ VJ.
P J.
On the on the FX rates.
Without overly guiding for next year, but I think if you look at sort of what happened.
In 2022 rates really took off in sort of Q3 Q4, and so the comparable for Q1 Q2.
I still think we will have a pretty big impact for rates next year as you look at sort of your modeling.
For next year.
And then in terms of just the capitalized variance piece.
We.
Won't give you specifics, but I will remind you that to the extent, we are making spot buys it relates to raw materials that get put in inventory and then the future utilization of those raw materials is usually over an eight to nine months timeframe. So that gets a little bit more to kevin's comment that we'll still feel some of that.
This into well into Q2 of next year.
And to the extent, we are still in a spot buy premium situation. In Q1 of 2023, then that will bleed into say Q3 as well.
Thank you. Our next question comes from Peter Chickering with Deutsche Bank.
Your line is now open.
Hey, good afternoon, guys. Thanks for taking my questions. The first one is that the thing is it is very consistent throughout this year about the strong capital demand and I understand that there is a give and take between backlog of orders does it where is the sales orders cancelled and new orders. So I guess can you talk specifically on new order.
New order strength for <unk>, and what Youre seeing for <unk>.
Against your expectations.
Yes, Peter this is Jason I'll jump in here.
I would point you back to some of the commentary around the order book and if you look at our capital business as it continues to be very strong and so as we as we look to the fourth quarter similar to the comments, Kevin sat around medical and instruments. We we certainly expect to recovery in the fourth quarter with instruments and another strong quarter for medical.
Well and even endoscopy, who had a very strong Q3, they grew their orders as well in the quarter. So they will also have another strong quarter in Q4, so it's really across our portfolio, where the demand is very very strong and we're not seeing sort of a capital slowdown, which I think I know I've heard of some other companies mentioned.
And we're just not seeing that in our orders were not having orders canceled.
It's something that I haven't seen in my 10 years here.
Customers ordering things and then canceling it.
So we feel very good about our position as orders have not slowed down and they just continue to grow.
One Little example, which on which I really enjoy is on both Sara we've now integrated that with our <unk> bed.
The alerts for falls from the fed actually go straight to the Badger, we're already showing this to our customers.
Getting really wild positive feedback from customers on this and again, it's early days, but the procured momentum, which really powered our strong medical growth. This quarter is just building and it's kind of the second year of a launch it's really just gaining steam and now with its interoperability with both Sarah.
<unk> the next drop.
Extra bit of energy to that business.
Okay Fair enough and then a follow up on.
Neurovascular was a touch weaker this quarter, just curious how much of that as a market versus competition versus supply shortage. Thanks. So much.
Yes, Thanks, we've seen a slow market this year in the U S. In neurovascular not exactly sure why there's a number of different theories out there as to why the market itself has been still I'd say, that's probably most of it.
But there are new competitors and bold aspiration as well stent retriever as the FDA has kind of reduced the requirements of the clinical requirements in those categories. So there are a number of new players, which.
<unk> part of it but the market has been soft.
Maybe it's a COVID-19 issue that some of these patients that would've had strokes.
Not having stroke because.
The mortality effects of Covid, it's hard to know exactly why but the market has slowed down definitely in the U S. I think that's probably the bigger portion, but there are also some competitive pressures.
Keep in mind that for us the U S is much smaller than our O U S business and neurovascular has always been that way. It's the one business that kind of has the reverse of the rest of our portfolio. So we continue to feel bullish about the long term.
Prospects on this business, we're only treating a small percentage of people that have strokes.
And as I noted in my opening remarks, we've just completed signed an agreement for a tuck in acquisition.
In the interest ocular.
<unk>.
Thank you.
Next question comes from the line of Matthew O'brien with Piper Sandler Your line is now open.
Thanks for taking that question. The first one is just on the restructuring you talked about is that is that something thats going to be impactful to next year.
Specifically to help drive that EPS growth and then do you have other levers that are kind of below the line that you can pull on that to help with the EPS growth for next year.
Well EPS growth as I mentioned.
There'll be a combination of price and in fact, some businesses are taking their system in the second round of price increases and having those the timing of that will start to really appear as contracts roll off. So price is one component cost reduction clearly is another component the restructuring action.
Actions are very targeted so it's really around things, we were going to do any ways to improve our our processes. We're just accelerating those activities youll see some of that this year, we'll see some of that into early part of next year and it will have an impact in our.
And our earnings per share for sure next year.
Below the line as you look at sort of aligning and taxes.
There are some opportunities related to how quickly we pay down the term loan so there could be some.
Some pick ups relative to interest expense, although those would be minor given the rates.
And then taxes.
Don't expect any surprises sort of steady as we've been there.
Okay. Thanks for that.
Then Kevin Brian on Mako with the new <unk>.
Sorry go ahead, I was going to say.
One last comment before.
We will get mixed benefits from the new products that we launch.
So thats one thing that you won't see that in the Priceline, but you'll step we will definitely get that benefit through the P&L, which helps our earnings.
Okay. Okay. I appreciate that and then Kevin I think back to the analyst day, maybe a year and a half ago.
You talked about Mako with these new indications that shoulder and spine kind of coming out I think more a step like having one one year than one then the following year is this now commentary about coming out at the same time, because maybe spine is getting pushed a little bit later than you expected before and I didn't hear you specifically say.
Spine and shoulder for Mako next year. So that's something we should expect more like 'twenty four and beyond.
Yes.
Not ready to give you a timeline now I wouldn't expect it next year, but one of the next upcoming calls perhaps January or the one after that we will give you some expected timelines.
The reason that they are coming out at the same time now there is two things one as spine has kind of moved ahead and its pace and shoulder kind of moved back a little bit because we had to adapt to the <unk> implants, and bringing the blueprint software and marry that with Mako. So we were on a certain timeline with the stryker shoulder implants, but we.
I wanted to switch to the tornado implants, there are the market leading implants. So we had to sort of delay that one.
But spine has been move forward. So the team has done a terrific job. We had two projects that were pursuing the card and one as well as Mako Mako is going to be the answer for US we've already started to show some surgeons.
<unk> received very very positive feedback on that so we're excited.
And so again the timing hopefully at possibly as early as January I will give you more specifics on it.
As you know robots are complicated that's why we're sort of hesitant to.
Give you timelines until we feel more confident but I would say that a lot of the challenges that we had before we've overcome and we've had good meetings with the FDA. We're on a very good trajectory on both of those.
Project is hard for me actually didn't know, which one will be first sales they will come up pretty in pretty close proximity to each other.
Thank you.
Our next question comes from the line of Joshua Jennings with Cowen. Your line is now open.
Hi, good evening. Thank you.
Wanted to start just on pricing.
Sounds like.
Okay sorry.
Getting some traction there on your pricing initiatives should we be thinking about price turning positive I think it's 70 basis points headwind through Q4.
Or is that too aggressive just wanted to get a better sense in the follow up question is just on.
Just the afcs with you.
So business, we're primarily joints.
Any any updates just in terms of receptivity for Mako robots.
Also just the pace of afcs opening and that seems to be maybe the bottleneck in terms of the.
The pace of migration of worldwide procedures into ASC, but wanted to just get a better sense of what youre seeing.
And AFC as well thanks for taking the questions.
Hey, Josh it's Glenn I'll take the first one on pricing.
First of all we're we're having obviously some big initiatives going on around pricing, making sure that we're educating customers in terms of what's happening to us relative to the cost of raw materials and things like that.
Pricing is mostly impacting med surge that's not to say there is not as big of impact on the ortho side.
Keep in mind too that most of our businesses are under some sort of contracts and so a lot of this sort of pacing is relative to as those contracts come up for negotiation, we can enter into that with those customers.
I think so far we.
We're seeing good progress we expect to continue to see good progress into Q4.
Call out a guide yet for next year, but what I would tell you.
One of the things that also will give us a little bit of lift that may not be reflected in pricing is the comment that Kevin made relative to new products that are released and most new products that are released our released at a premium price relative to the legacy price and so that will give us a little bit of uplift as well.
Okay and related to your question on ASC.
Our offense continues to exceed our expectation.
Just the bundle that we provide for the ASC to make life easy for them is being very well received close to half of the deals that we win includes a mako.
These orthopedic ASC.
<unk>, we've now crossed the 10% Mark of large joints that are done in afcs, it keeps going up not at a rapid rate, but its a steady decline and to your point. The gating factor is just construction.
Furbished Mint at these ASC to enable more procedures, but every hospital system I talked to is preparing themselves for another new ASC. It's.
It's a trend that started prior to Covid and has accelerated and we expect that that will continue but we love our position the breadth of our portfolio, having capital disposables in implants puts us in a really leading position.
In Makos as I said almost half the time are included and that gives us a John advantage.
Thank you.
Next question comes from the line of Matt <unk>.
With Barclays. Your line is now open.
Great. Thanks, so much for fitting me in a lot of great.
How has it been covered here, but.
First just like to say look to see the interoperability and connected care comments around both Sarah color around Mako.
My shoulders.
Exciting.
I wanted to just maybe focus a little bit back.
Back to margins on some of the purchasing comments you made Glenn and just to get a feel for.
How much of what impacted you in the third quarter.
Had to do with.
Spot buys purchases made in previous quarters, and then well.
And I think you mentioned that some of those prices are getting a little bit easier, which better maybe which then.
That.
Have we hit a high watermark in terms of the <unk>.
Impact on margins or.
Is it too early to say and I had one follow up.
Okay, Yes.
I think.
I mean, a couple of things as you as you sort of think about the guidance the 250 basis points.
In rough terms half of that is.
Being driven by sort of the premiums that we're paying on the spot buy purchases.
And then the other half is really kind of solidly grounded in what we're seeing on the inflation and the inefficiency side somewhat somewhat tempered by sort of some cost discipline, even within within our operations on the spot buys.
I think what I, what I was saying is that we have better visibility now to our ability to acquire supply.
We are seeing some moderation, although not as much as I think we were hoping to see as we entered into Q3 in terms of what those costs are so things are just they are not coming down as quickly as we wanted them to nor do I expect that our spot purchases in Q4 will come down significantly either.
And then on the inflation side a lot of that is flowing through.
Increases in labor increases in commodity prices that we're paying.
We're in this difficult supply chain situation.
We're having to use a lot of say airfreight versus ocean freight, which cost a lot more to expedite.
Raw materials coming in so that we can manufacture and get out to customers and so those are the type of inflationary things that we're feeling that are in that number.
Got it that's helpful and then.
Maybe just one of the dynamics Q3 to Q4, you mentioned that product mix was a bit of a headwind pretty like Q3, maybe.
If you could highlight some of the.
Ways in which you.
We expect that to improve in Q4 Q1 in and around that in particular it seems like your businesses are sort of seeing a better.
Better look from from some of the staffing challenges in hospitals and some other companies and not everyone is seeing improvements I was just wondering.
How do you think about what youre seeing with priorities.
Means versus other procedures in there any color that you are getting what would kind of help folks understand.
What exactly is happening what's happening how unevenly.
Unevenly affecting different procedures in different settings.
Okay. Let me let me take the first part of that question relative to mix and what we saw in Q3 and and how we think that might play out in Q4.
You can sort of look at sort of sales growth as a proxy for where we felt the pain of mix.
Instruments was down and that's a fairly highly profitable business for us NV was also a little bit down and that too is a highly profitable business for us and so.
Those not being a normal proportion of our sales really sort of heard us somewhat at the margin line.
I think instruments has good visibility to supply moving into Q4, and so I do expect that.
We will see a good performance out of instruments as we wrap up the year.
It's a little bit different it's not capital and there is not sort of.
Our backlog of orders and be as very procedural based but.
I know that <unk> is very focused on finishing out the year and hitting their quotas and so I think we will see some improvement out of MD as well, yes, just last point on mix I think Australia is one of the big Big markets for Stryker and Dave <unk>.
Been hit by Covid and delays in and they do expect a stronger. It's already started to is we're seeing that start to build in and Thats a highly profitable business as well. So those are that's another element of mix, we're going to see improve in Q4 versus Q3 and then your other question I'm not sure I totally got it but I think you were talking about different procedures.
How we're seeing the recovery and clearly hip and knees were seeing.
A robust recovery.
Theres, a big waiting lists which in the U K and.
Physicians, who took maybe took some time off in summer.
A little bit more than they normally would given coming off the call that are very busy now.
And they are starting to operate more as much staff is available for them. The more they are going to operate and staffing is still little bit channels, but it has been gradually improving so.
There, we see robust kind of growth going into next year spine has been a little bit more choppy to be honest I don't think it went down as much as had been needed.
If you look at the Omicron variant and everything that spine procedures were still a little bit more resilient and so we're not seeing that pop quite at the same extent as we are and our hip and knee and I mentioned already neurovascular in the U S where the market is soft and thats the one that.
I saw some comments related to Teva that talked about the market being a little bit soft and I wonder if that patient profile with all these comorbidities there might be something similar that could be impacting the issuing of stroke.
One of the markets. So that's hopefully answered that part of your question.
Thank you.
Our next question comes from the line of Rick Wise with Stifel. Your line is now open.
Yeah.
Good afternoon, Hi, Kevin.
Two questions from me first.
Touched on it a little bit, but you talked about Asia Pacific.
Specific being continuing to be volatile in China negative growth.
And that those pressures continuing.
So at the end of 'twenty two.
In general at a high level.
Are you.
What's the setup for next year are you assuming as you look at the landscape that.
Things are going to get better.
Again your high level thoughts there.
Sure sure at a high level.
Covid is.
As had a delayed impact and a lot of Asia Pacific and we certainly expect it to get better we're already seeing it Japan had a really nice quarter. This quarter, Australia will pick up in Q4. Some of the ASEAN countries are improving so I do expect the outlook to be better next year in Asia Pacific overall than this year.
Our emerging markets had really robust double digit growth in spite of China being.
Slightly negative it was negative really driven by volume based procurement in the orthopedic side of our business and pretty good performance on the med surge and neurotechnology side of the business, but but we finally after many years started to build tremendous momentum in Latin America as well as.
Emerging.
Europe .
At least in Africa, where we're gaining really tremendous momentum was really driven by Mako as well as our 16 88 camera, that's driving really strong growth. This year and I think that should continue going into an extra even India.
Has really had a terrific year this year and as you know we've had our share of challenges in the past. So I would say the international story for Stryker is starting to click as you saw since 2019 of our international organic growth has outpaced the U S and.
And that did not happen in my first seven years as CEO .
And I do expect that to continue and frankly, the COVID-19 tailwind should should really cement that going forward.
Great and then one other.
Big Picture question Kevin.
And then you usually have great perspective on this kind of stuff.
One of the toughest questions to answer for me is how when and where.
There was kind of the supply chain issues, particularly around chips, how does it get resolved when does it get resolved.
And I'd be curious to hear.
What you're thinking for the industry, but what are you thinking how are you going to resolve this so that you can stop worrying about at pre strike rate. Thank you.
You just have to wait or are there.
Tangible steps that you can take our industry needs to take scale.
To get past the topic I appreciate that.
Yes look it's a great question I would tell you. This year has been extremely frustrating.
Unlike any year iPad.
To be honest, we Miss estimated we thought early on we were going to have 100 to 200 basis points of pressure and Netherlands, saying, it's $2 50. So that's something we did not call. It's been difficult to predict I think one of the steps that we're taking which is really kind of exciting is as you move to new products. So as we move to.
Our system and as we move to 17 88.
Using new generation chips, and the supply availability is actually quite high for new generation chips and so the faster we can migrate to new products. It actually helps secure our ability to have.
Supply and so we are pushing R&D teams really hard to be able to shift to these newer products because our challenges frankly, the older generation chips.
And Thats why emergency care, so pressured emergency care being defibrillators, primarily because their PMA products, we can't just swap the chip it goes through a hole.
Our regulatory.
Regime and those are older generation ships. So the faster we can migrate to new products the factors faster that secures our chip availability.
It's been kind of.
Moving target as we've secured chips with one supplier, we have a new problem with another supplier.
And even things like resins, and so it's been it's been a very unusual and tough year, but it's slowly getting better Rick and as we launch new products that will get us really healthy.
<unk>.
New chips are the problem.
<unk> is really getting the old electronics and frankly, the camera business. It gave our endoscopy team a lot of credit that they were able to actually <unk>.
Qualify some new products, because it's not PMA they were able to really drive good growth, but it's been a scramble and we're hopeful that things get stable really I think we're going to be in this soup for probably.
Another couple of quarters.
The middle of the year, and then I think the sizeable disguise will start to clear, but you know what.
That's total Crystal Hall, and we haven't been right. This year, but that's sort of pilot looks right now, but it'll still be a little choppy, but its just moderately getting better.
As we go through the year.
Thank you.
Our next question comes from drew Ranieri with Morgan Stanley . Your line is now open.
Hi, Kevin and Glenn Thanks for taking the questions.
Just maybe Kevin on your comments.
Tom and stop for acuity the bed launch Youre, gaining momentum there and it's in your second year of launch just kind of curious how the launch is progressing and if you could give us an update on where you are in terms of market share. The replacement cycle and then really what should we expect now that you have integrated both Serra <unk> bad should that have a meaningful acceleration in <unk>.
Two the procure to launch.
Yes.
Very bullish on security, it's a fantastic product.
And the cross sell capability with both Sarah.
We were strong, let's say with for acuity or beds.
It wasn't a stronger horse Sarah Congress stable, Sarah was strong, but we didn't have a strong hedge position that cross sell opportunity is already presenting itself. We've been in front of some very big accounts and we're showing them. This integrated system.
We've already gotten some orders and some bullish it has had a terrific third quarter.
We're trying to make them as fast as we can right now which is a high class problem.
And so I think youre going to see very good results for acuity.
It's a winning bet and Vocera is just going to add gas to the fire.
Yeah.
Thank you Ed Glen maybe one for you, but I know you don't necessarily want to give 'twenty three guidance at all but just as you're thinking about free cash flow in kevins comments about strong EPS growth.
Growth for next year can you help us contextualize that.
Maybe what free cash flow growth, we should see for next year or working capital improvements. Thank you.
Yes.
I think right now just given.
All the variability in kind of where we are with just focused on this year and finishing up.
I'd hate to throw out a number for free cash flow conversion.
I think it would be safe to assume that it wouldn't be far away from our historical averages and that's probably where we would land for next year keep in mind for next year, our focus will still be debt repayment and we'll pay down the rest of that term loan before we allocate other capital to M&A.
Thank you.
Our next question comes from David Saxon with Needham and company.
Your line is now open.
Hi, good afternoon, thanks for taking the questions.
Maybe to start on extremities, just wondering what youre seeing in the foot and ankle market did any procedures performed.
Better or worse than others, and then ill ask my second question upfront here, maybe can you talk about the Q guidance system. How that early launch is going and maybe you can touch on the launch strategy pricing.
And feedback you got from gas thanks, so much.
Yes, so starting with foot and ankle there really terrific Q3, the highest growth within foot and ankle is coming out of our total ankle where we have a clear market leadership that had double digit growth, but even though the midfoot forefoot procedures are picking back up as you know pandemic did kind of slow down to those.
Somewhat but they had a very good Q3, we had a number of new launches in that in that.
Category four foot launches. So we're feeling very good about that going forward, but it was it was a strong Q3 that contributed to especially in the United States that contributed to the <unk>.
Double digit growth that we had in trauma extremities in the U S. In the second.
Q guidance, yes, really terrific feedback because it's an incredibly fast internally developed camera much faster than what you see.
The competition using it also actually provides suggestions about which screws to use and so that's very novel as well and that will be the camera that will be.
Ported to Mako for the future and it really simplifies the workflow very very positive feedback that contributed to the strong enabling technology performance. So we haven't.
Number of very good sales of the Q guidance system in Q3, and that's picking up into Q4. So so far so good on that launch obviously, we still want to get to make them and we also have another project.
Copilot Thats the kind of the internal code name, which is really around drills and providing some haptic feedback, which we were able to show some of the surgeons at NASS.
Great feedback because that doesn't exist in the market today. So we have a pretty comprehensive portfolio and enabling technology for spine, it's going to take some time to bring these additional products to the market, but Q guidance was.
Very well received especially because of the speed and efficiency.
That we offer without requiring them to change their workflow.
Great. Thank you.
Thank you.
Our next question comes from Steven Lichtman with Oppenheimer. Your line is now open.
Thank you hi, guys.
Couple of follow ups.
Jason in capital, we've talked a lot of this evening about supply, but in the prepared remarks.
You talked about installation delays due to variability in the hospital environment and scheduling challenges can you provide more color on what youre seeing specifically when you talk about that and that variability and with those comments related to both traditional medical and Mako and then I just have a quick one for Glenn.
Yes, I'd say a couple of different things just as you think about that and think about capital obviously, our larger capital is beyond make all right, but what we're seeing is.
Sometimes I think when we talk about staffing challenges people go right to nurses in some of those things, but really what we're talking about here is even like if you think about our com business Youll have scheduled installations people show up to do an install they'll get cancel about to come back and so that's that's the variability of that im referring to.
To that.
Sometimes delays installs and ultimately revenue and gets pushed out.
In terms of <unk>.
Yes, yes.
Glenn just just my.
Follow up for Glenn just one variable for next year wanted to ask you about is FX.
Based on where were see where rates are today I mean, you talked about some of the quad.
Qualitatively about the impact next year, but would be impact next year versus this b.
Be about the same as what Youre seeing this year versus last based on where rates are sitting today.
Yes, I think without doing the math or having any other basis next year. If I just look at rates roughly going to be the same yes, we'll be more precise in January but that's a pretty good starting point.
Okay. Thanks, guys.
Thank you.
Our next question comes from Ryan Zimmerman with <unk>. Your line is now open.
Hey, guys. Thanks for taking the questions and happy Halloween.
A couple for me, Kevin where a few years past.
K two acquisition and given where the performance has been these past few years I wanted to get your assessment of kind of the spine business and how you feel thats come together and that dovetails into my next question, which is just about Sarah having some disruption.
What did you learn from the disruptions in K, two and kind of what are you expecting from the disruption you have in both Sarah and how you maybe.
Improve upon what you went through with K too in terms of disruptions with Vocera. Thanks.
Yes. So let me first say this that will share of disruption is very different than <unk> disruption.
<unk> and overlap deal, where you have the same sales reps selling the same kinds of products. That's the hardest kind of deal to integrate frankly, we learned a lot from <unk> that we then put into a Wright medical integration, which has gone extremely well that's more analogous where the foot and ankle as an example, or upper extremities you up.
We're lapping reps for Sarah is not an overlap deal. So that one is going to be a lot easier to get through we did the same thing with physio control. If you remember we merged the emergency care are are powered costs for the ambulances with defibrillators and we merged that Salesforce. So we had some disruption in the first year, but we got through it pretty fast and then we got into.
Two a torrid double digit kind of growth trajectory thereafter, so for Sarah.
Have a little bit of disruption just because of the sales force, but also because we'd like to move more of the business to the cloud, which will be better for us and better for our customers long term versus being on premise and so we don't mind, taking a little bit of pain.
In the for the next quarter or two but thereafter, you should expect that to be able to say, it's a lot easier from an integration standpoint. This is just running the stryker offense without having to have reps competing as I think about spine. It's obviously the most competitive market. We plan. It is a very tough market <unk> was not a very expensive.
Acquisition compared to alternatives that we looked at the time, it's been okay deal that hasnt been one of our best deals, but but it solves a problem for us where we would have frankly been growing below market rates had we not done the deal we were able to kind of hang on to be able to grow around market rates with some good innovation and now that we've got our enable.
<unk> technology.
Roadmap I'm actually pretty excited about spine in the future, it's going to continue to be a bit of a dog fight.
Through sort of the end of next year, but going into 'twenty four already with two guidance, we have a bit of a spring in our step.
New expandable distribution deal with lifestyle. So we are starting to feel a little bit of momentum our monitoring new launch as well. So we're starting to feel a bit of momentum, but not having a robot is a problem.
We do have this project with Mako that will help solve that problem.
And we are committed to spine long term, but clearly it is the most challenging market.
<unk>, but but certainly.
For <unk>, we will have probably roughly flat sales growth year over year for Q4, Q1, and then you should expect.
<unk> to start to zoom after that.
That's very helpful. And then if I could just squeeze one more in real quick in terms of delivery you talked about some of the capital cycle and the dynamics of the supply chain.
And just if you were to order a product today from you guys and upon receipt. It takes maybe 90 days under normal circumstances.
Help us understand some of these orders that are pulling through our extending beyond the quarter. I mean, I don't know if you guys Glen want to quantify this but is it 20 days now because of the delays in the 110 days total I mean is it.
A few months after just as we think about kind of the extension of the the order book, which still continues to be strong what does that mean quantitatively in terms of order to delivery.
Ryan It's Jason I'll jump in here and what I would say is first off I'd point you back to my prepared remarks in terms of <unk>.
This being a moderate tailwind for some time right in terms of.
How much longer is the delivery cycle.
Candidly, it's going to vary by product cycle, right or the type of product that it is and so.
We're certainly not going to quantify in terms of the impact there, but it certainly does vary.
Thank you. Our next question comes from Matt Taylor with Jefferies. Your line is now open.
Thank you hi, guys. Thanks for taking the question I'll just ask a follow up on that theme I guess I was really interested in your comments about <unk>.
Kind of a procedural backlog and perhaps taking some time.
Burnt off in addition to your order book.
So the royalty that up its just that.
Are there areas of your portfolio, where you see greater or lesser backlogs as to help us think about how those things could come back.
Over time, and I guess, what are you looking at to predict that you can actually see this procedural run off take more than 2023, and then into 2024.
Yes, I think hip and knees are the areas, where I think it's not just a stryker thing I think the market.
We'll be more robust.
You can talk to our competitors.
I think they would share that osteoarthritis doesn't improve itself.
Patients are going to need these procedures agent population and demographics play in our favor and I think youre going to see that tailwind is just I. Just don't think it's going to be certainly aren't gonna be operating on weekend and their staffs on available to have a big Spike and then kind of a return to normal. So that's why I think it'll be.
Gradual tailwind for multiple quarters, but those are that's the business I think youre going to see that kind of sustained positive momentum on the surgery volumes.
Alright, great ill leave it there. Thank you so much.
Thank you.
Moderator.
Oh I do apologize.
Thank you Matt Taylor.
Your line is now closed and the next question comes from Richard <unk>.
With.
Your line is now open.
Hi, Thanks for taking the question.
Sam on for the team.
I'll just ask both upfront.
Upfront.
On SG&A about call. It 100 basis points improvement in Q3, Q here should we think about that being sustainable into <unk> and then.
With the restructuring is there.
For that to continue to improve into 'twenty three.
Then similar question on R&D, I mean should we think about that 7% level being right for the full year and how should we think about that directionally end of <unk>. Thanks.
Yes, Sam this is Glenn.
On SG&A I think.
Generally the only thing that really becomes significantly variable assist sales commissions that flows through there. So in terms of the kind of procedures and controls that we put in place relative to discretionary cost control, we should see that continue into Q4.
So that's probably a pretty good proxy and then on R&D.
Been hovering at that level honestly for several quarters and so.
Only variability might be that sales are a little larger in Q4, which might actually make the percentage go down a little bit in R&D, but I do think that that run rate is a good approximate.
For the full year for the full year.
Okay.
Yeah.
Is that on a dollar basis.
On a percentage basis, we sent a 67% of sales roughly.
That's a pretty good number for a full year.
Keep in mind Q4 is seasonally our strongest so you are going to see.
Much higher margin than you've seen certainly the last two quarters in Q4.
Okay.
Thank you.
Our next question comes from Jason Bedford with Raymond James.
Your line is now open.
Hi, good evening all.
Just real quick here, realizing we're deep into the call, but just on China. When do you. When do you expect with GBP dynamics to subside or Anniversarying of Korea.
Yeah. This is Jason I'll take this one so just as a reminder, right China overall is less than 2% of our sales.
And the sales that are exposed to pvp are actually less than 1% so fairly immaterial, but.
Relative to kind of the next impact there will be an impact as we go into next year around NV.
Obviously, we're not going to guide at this point, but.
Youll hear more about that as we get into next year.
Jason does that start in 'twenty, three or what do you see any impact here in the fourth quarter.
It'll start in 'twenty, three and again, we'll talk more about timing when we when we get closer but it will be 23.
Okay. Thank you.
Thank you.
Next question comes from Jeff Johnson with Baird. Your line is now open.
Hey, guys. Good afternoon. Thanks for squeezing me in just a quick follow up I really just a clarification Jason in your prepared remarks, you talked about Mako installed being delayed during the quarter I think in a follow up to Larry <unk> question, you talked about orders for Mako being soft.
Orders wasn't the installs and maybe a little more color just on what exactly happened in the third quarter and whats the confidence of that recovery and in the fourth.
Yes, no my comments were definitely specific to installs.
I may have I may have made a comment relative to a strong order book, which is absolutely the case and we do expect a strong fourth quarter.
Yeah.
Thank you.
Thank you.
Okay.
There are no more questions waiting so I'll pass the conference back over to Kevin <unk> for closing remarks.
Well. Thank you all for joining our call we look forward to sharing our fourth quarter and full year end 2022 results with you as well as our 2023 guidance in January Thank you.
Okay.
That concludes today's call.
Thank you for your participation you may now disconnect your lines.