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Operator: Welcome to the Fourth Quarter and Full Year 2022 Stryker Earnings Call. My name is Tanya, and I will 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-and-answer session. 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. Also, 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 Stryker’s current report on Form 8-K filed today with the SEC. I will now turn the call over to Mr. Kevin Lobo, Chair and Chief Executive Officer. You may proceed, sir.

Kevin Lobo: Welcome to Stryker’s fourth quarter earnings call. Joining me today are Glenn Boehnlein, Stryker’s CFO; and Jason Beach, Vice President of Investor Relations. For today’s call, I will provide opening comments, followed by Jason with the trends we saw during the quarter, Mako performance insights and updates on Vocera and Wright Medical. Glenn will then provide additional details regarding our quarterly results and 2023 guidance before we open the call to Q&A. I will begin with the macroeconomic environment. 2022 was a year where we, alongside many companies, faced unprecedented supply chain challenges and inflationary pressures. We faced these challenges and delivered for over 130 million patients and for our customers all over the world.

We also remain focused on the future, as we progress our pipeline of innovation, enabling a super cycle of new product launches across our portfolio in 2023 and 2024. I want to thank our 50,000 employees for their unrelenting determination and agility. In the fourth quarter, we delivered organic sales growth of 13.2%, which brought our full year organic sales growth to 9.7%. During my 10-plus years in this role, these were record quarterly and annual growth rates. The growth was balanced across our businesses and regions in implants, disposables and capital equipment, and was highlighted by our Medical division, which had Q4 organic sales growth of over 25%. Additionally, for the fifth consecutive year, our international organic growth rate exceeded our U.S. growth rate, demonstrating the progress we are making on globalization.

This was highlighted by Europe, Canada, Australia and emerging markets, which all posted double-digit growth in the quarter. International growth remains a significant opportunity in the years ahead that should continue to complement our strong U.S. business. Next, we delivered quarterly and full year adjusted EPS of $3 and $9.34, respectively, exceeding our latest guidance range. This was driven by our strong sales performance, which offset inflationary pressures and negative foreign currency. Also, we are progressing with our actions to address higher costs, which include both pricing and targeted restructuring plans. We have begun to see the impact of these initiatives and expect an improving trend over the course of 2023. We also expect the positive trends in procedural recovery to continue alongside strong demand for capital products.

And while component availability will continue to be variable in 2023, we do expect that it will gradually improve throughout the year, lessening the need for spot buys. We will remain disciplined with our spend and we will continue to invest in innovation, including potential tuck-in M&A. 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 full year 2023 guidance of organic sales growth of 7% to 8.5%. This growth combined with the continued challenging macro emit environment, our pricing and cost actions will translate to an adjusted EPS of $9.85 per share to $10.15 per share. I will now turn the call over to Jason.

Jason Beach: Thanks, Kevin. My comments today will focus on providing an update on the current environment, as well as Mako, Vocera and Wright Medical. Procedural volumes continue to recover throughout the fourth quarter in most countries. Parts of Asia-Pacific, however, have continued to be more volatile due to ongoing COVID-related impacts. While volumes are recovering, hospital staffing pressures have continued in pockets around the globe and patient backlog remains. As mentioned on the Q3 call, these challenges will likely resolve gradually and we continue to expect this will be a moderate tailwind as we move through 2023. Additionally, demand for our capital products remained very healthy in the quarter, as seen from the double-digit organic growth of our Medical, Endoscopy and Instruments divisions.

Even considering our finish, we exited the year with a very strong order book. Next, specific to Mako, we had a record quarter of installations in both the U.S. and internationally. We continue to be agnostic to the form these deals take and will continue to offer flexible options for our customers to acquire capital equipment. The great progress of our Mako offense has resulted in strong growth of our installed base alongside continued increases in utilization. In the U.S., we saw approximately 55% of knees and almost 30% of hips performed using Mako in the quarter. Also, in December, we surpassed our 1 million cementless knee procedure with cementless knees continuing to index higher in make accounts. So in addition to being the leader in robotic-assisted surgery, we are also well ahead on cementless knee adoption.

Finally, we are making good progress with the development of our Mako spine and shoulder applications, and expect to have the initial launch of spine in the back half of 2024 and the initial shoulder launch at the end of 2024. Now to our key acquisition and integration activities, our Vocera integration continues to progress well, and as a reminder, we will anniversary in February of this year. Q4 results were consistent with our commentary on the last earnings call, as is the expected sales ramp beginning in Q2 of this year. Turning the page to Wright Medical, we have now passed the two-year mark of the integration of Wright Medical. This has been our largest acquisition to-date. Now complete, we have exceeded expectations on both our sales and synergy assumptions, as the cultural fit was strong and we implemented our integration playbook very effectively.

Additionally, it was a catalyst that drove the creation of three separate business units, allowing us to serve unique customers across core trauma, upper extremities and foot and ankle. All three businesses exited the year with terrific momentum and strong R&D pipelines. Overall, this acquisition has proven to be a great success and we are excited about what the future holds. With that, I will now turn the call over to Glenn.

Glenn Boehnlein: Thanks, Jason. Today, I will focus my comments on our fourth quarter financial results and the related drivers. Our detailed financial results have been provided in today’s press release. Our organic sales growth was 13.2% in the quarter. The fourth quarter’s average selling days were in line with 2021. The impact from pricing in the quarter was unfavorable by 0.6%. We continue to see a positive trend from our pricing initiatives, particularly in our U.S. MedSurg businesses, which all contributed positive pricing for the quarter. Foreign currency had a 3.8% unfavorable impact on sales, the supply chain disruption somewhat lessened during the quarter and our capital order book continues to be very robust as demand from our customers remains strong.

In the quarter, U.S. organic sales growth was 11.2%. International organic sales growth was 18.3%, impacted by positive sales momentum across most of our international markets. For the year, organic sales growth was 9.7% with U.S. organic sales growth of 8.9% and international organic growth of 11.7%. The impact from pricing in the year was unfavorable by 0.9% and 2022 had the same number of selling days as 2021. Our adjusted EPS of $3 in the quarter was up 10.7% from 2021, driven by higher sales and strict cost discipline, partially offset by inflationary pressures and the impact of foreign currency exchange translation, which was unfavorable $0.16. Our full year adjusted EPS was $9.34, which represents growth of 2.8% from full year 2021, reflecting the favorable impact of sales growth, lower net interest costs and a lower effective tax rate, partially offset by inflationary pressures and the unfavorable impact of foreign currency exchange translation of $0.31.

Now I will provide some highlights around our quarterly segment performance. In the quarter, MedSurg and Neurotechnology had constant currency sales growth of 19.3%, with organic sales growth of 16.9%, which included 14.9% of U.S. organic growth and 22.5% of international organic growth. Instruments had U.S. organic sales growth of 11.7%, led by double-digit growth in the Surgical Technology business. From a product perspective, sales growth was led by power tools, Steri-Shield, waste management and smoke evacuation. Endoscopy had U.S. organic sales growth of 9.7%, highlighted by strong growth in sports medicine, communications, video, general surgery and ProCare. Medical had U.S. organic sales growth of 22.9%, driven by our emergency care and acute businesses.

The growth was fueled by double-digit growth across our emergency care and Prime Structure businesses, and also benefited from improvement in product supply throughout the quarter. Our U.S. Neurovascular business had organic sales growth of 1.5%, driven by continued market softness and competitive pressures. The U.S. Neurocranial business had impressive organic growth of 19.7%, which included double-digit growth in our Sonopet iQ, Signature High Speed Drills, silver glide bipolar forceps and Max space Neuro product lines. Internationally, MedSurg and Neurotechnology had organic sales growth of 22.5%, reflecting double-digit growth in all businesses. Geographically, this included strong performances in Europe, Australia and emerging markets.

Orthopedics and Spine had constant currency sales growth of 8.3% with organic sales growth of 8.4%, which included organic growth of 6.2% in the U.S. and 13.6% internationally. Our U.S. hip business grew 11.3% organically, reflecting strong primary hip growth fueled by the recent launch of our Insignia Hip Stem, the ongoing success of the Mako THA 4.1 software upgrade and continued procedural growth. Our U.S. knee business grew 7.8% organically against a very strong Q4 2022 comparable of over 14%. This reflects our market-leading position in robotic-assisted knee procedures. Our U.S. Trauma and Extremities business grew 11.9% organically with strong performances across all three businesses, led by double-digit growth in upper extremities and foot and ankle, and strong performances in plating and nailing.

Our U.S. Spine business grew 0.5%, led by performance in our enabling technology business, including the recently launched Q Guidance navigation system. U.S. Other Ortho declined organically by 18.7%, primarily driven by the impact of deal mix changes, specifically more rentals related to Mako installations in the quarter. Internationally, Orthopaedics and Spine grew 13.6% organically, which reflects strong performances in Europe, Australia, Canada and India. Now I will focus on operating highlights in the fourth quarter. Our adjusted gross margin of 62.7% was unfavorable, approximately 310 basis points from the fourth quarter of 2021 and in line with Q3 2022, reflecting the impact of the purchases of electronic components at premium prices and other inflationary pressures primarily related to labor, steel and transportation costs, and unfavorable business mix.

Adjusted R&D spending was 5.5% of sales, which represents a 90-basis-point decrease from the fourth quarter of 2021. Full year adjusted R&D spending was 6.7% of sales, which was slightly higher than our 2021 adjusted R&D spending of 6.6% of sales. Our adjusted SG&A was 30.6% of sales, which was 150 basis points lower than the fourth quarter of 2021. This reflects the impact of increased focus on discretionary cost control and headcount discipline. In summary, for the quarter, our adjusted operating margin was 26.6% of sales, which was approximately 70 basis points unfavorable to the fourth quarter of 2021. This performance is primarily driven by the aforementioned inflationary pressures, primarily on gross margin and the negative impact, resulting from foreign currency exchange translation, somewhat offset by cost discipline.

Other income and expense of $53 million for the quarter decreased from 2021, primarily due to net favorable interest income. For 2023, we expect a quarterly run rate of $65 million for other income and expense. Our fourth quarter and full year had an adjusted effective tax rate of 13.8% and 14%, respectively, reflecting the impact of geographic mix and certain discrete tax items. For 2023, we expect our full year effective tax rate to be in the range of 14.5% to 15.5%. Focusing on the balance sheet, we ended the fourth quarter with $1.9 billion of cash and marketable securities, and total debt of $13 billion. Approximately $150 million of term loan debt was paid down in the quarter, which brings our year-to-date payments to $650 million. Turning to cash flow, our year-to-date cash from operations is $2.6 billion.

This performance reflects the results of net earnings, partially offset by lower accounts receivable collections due to higher sales at the end of the year, the impact of higher costs for certain electronic components and pre-buying of certain other critical raw material inventory during the year. For 2023, we anticipate that capital spending will be approximately $600 million. Again, in 2023, we do not plan to do any share buybacks and we will continue to focus on further debt reduction. And now I will provide 2023 full year sales and earnings guidance. As we assess the current operating environment, we believe that there will continue to be macroeconomic volatility, including supply chain constraints, recession and inflationary risks and currency fluctuations.

Despite this environment, we have positive momentum in many parts of our business heading into 2023, including continued procedural recovery, many new product introductions and a very robust order book for our capital products. Given the above, we expect organic sales growth to be in the range of 7% to 8.5% for the full year 2023 when compared to 2022. There are the same number of selling days in 2023 compared to 2022, with one extra day in Q1 and one less day in Q3. Based on the steady progress of our pricing actions, we would expect the full year impact of price to be between zero percent and minus 0.5%. If foreign exchange rates hold near current levels, we anticipate sales and EPS will be modestly unfavorably impacted for the full year, being more negative in the first half of the year.

This is included in our guidance. While we are not specifically guiding the quarters, keep in mind that as you compare the first quarter to the prior year quarter, Q1 2022 did not have the inflationary pressures that we are now experiencing. So despite a strong growth outlook, we do not expect Q1 EPS to be much better than Q1 2022. Finally, for the full year 2023, we expect adjusted net earnings per diluted share to be in the range of $9.85 to $10.15, representing a return to op margin expansion. This guidance range assumes a gradual improvement of the global operating environment, including a progressive easing of supply chain disruptions throughout the year. And now, I will open up the call for Q&A.

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Operator: Our first question comes from the line of Robbie Marcus with JPMorgan. You may proceed.

Robbie Marcus: Great. Thanks for taking the questions and congrats on a really nice quarter. I wanted to start out on the MedSurg side of the business, where you had really, really strong performance in the fourth quarter. You talked about a healthy order book, but I was hoping you could give a little more visibility into exactly what you saw, was there a bolus of demand there, was this all underlying or catch-up demand and then you talked about a healthy order book, but just what you are seeing in terms of your hospital clients around the world and their desire to continue to buy capital here?

Kevin Lobo: Yeah. As you can tell, Robbie, it was a terrific quarter for all of Instruments, Endoscopy and Medical. Medical in particular, had a giant growth in the quarter, really digging out of some of the backlog that they had of orders. If you look at the backlog entering 2023, it’s actually higher than what we had at the end of 2022. So it was a little bit of catch-up from prior quarters, but as we think about next year, right, the outlook for all divisions is strong again next year. We also have a lot of new products coming in those three divisions. So strong order book, strong demand for our product, strong cans of new pipeline, terrific leadership teams. This really — these three divisions have been, if you go back even from 2016, there — every year they are either high single-digit or low double-digit growers and that was no different in 2022.

Robbie Marcus: Great. And maybe a follow-up for Glenn, you talked about second half, probably, better than first half. I have been on this call a bit before this call and you talked about first quarter EPS not being much better year-over-year. Any other color you could give us both on the topline as we think about 2023, just given there are some highly variable growth rates on the topline, as well as margin things to think about down the P&L? Thanks.

Glenn Boehnlein: Yeah. Yeah. First of all, just picking up where Kevin left off, if you think about the topline, entering the year with such a strong order book, it’s really going to kind of bode well for growth of our big capital businesses. The other thing we are really seeing is this procedural expansion and so we feel really good about our momentum, especially in hips and knees and trauma and extremities. So we are going to continue to see those grow as well. That plays into the mix of what we see when we get down to gross margin. We do think the first half of the year we will be working our way through some of that higher dollar inventory that was built up at the end of last year. We are seeing some bright spots in supply chain.

We are seeing an environment where we think there will be less spot buys and so all of that will go into in terms of us progressively improving both our gross margin and our op margin. I think the other thing to keep in mind, too, is that, our pricing initiatives and actions really took hold in Q4 and we felt that especially on the MedSurg side. We will benefit from those actions for the full year in 2023. We will also see that’s not included in price. All the new products that Kevin talked about that we will launch, those come out at premium prices. So that will also benefit and help us with our op margin improvement. And then the last thing is, we still have some targeted restructurings that will take place in 2023, especially in the first half of 2023.

So we will also begin to feel the benefit of those in the second half. So I think Q1 is a little pressured year-over-year just because the inflation wasn’t sitting in last year’s op margin and it is sitting in 2023 op margin. But I think as the year progresses, we will continue to improve on that op margin, and obviously, that will drive to the EPS growth that we guided to.

Robbie Marcus: Really helpful. Congrats again. Thanks.

Kevin Lobo: Thank you.

Operator: Thank you. The next question comes from the line of Matthew O’Brien with Piper Sandler. You may proceed.

Matthew O’Brien: Good afternoon. Kevin, at the Analyst Day, when was it, this was a couple of years ago, you really exercised international. The performance in the quarter was phenomenal and it’s been really strong. I am just wondering the durability of that and should we think about international being not quite half of the growth on the topline this year, but something around that level. Is that how important international should be for you guys in 2023 and even beyond? Thank you.

Kevin Lobo: Yeah. Rather than thinking about what percentage of the growth is, is just how durable is it? Five years in a row now, organic sales growth has exceeded the U.S. organic sales growth, and of course, China has really didn’t contribute anything in 2022. So Europe was double-digit grower. It’s a growth engine for Stryker. I have talked about Europe for the last six years or seven years and we are hitting our stride in Europe. But even other emerging markets, whether it’s Latin America, whether it’s the Middle East, Eastern Europe, parts of East Asia, we have really started to hit our stride. It feels exciting. We have great leadership teams. We are getting great penetration now with Mako and fluorescence imaging, some of those power brands are now really starting to show up effectively.

So the way I’d like to think about it is that emerging markets should grow roughly double the growth rate of Stryker’s growth rate, and overall, we should continue to grow above the Stryker growth rate in these international markets. And as over time, if we don’t continue to have large acquisitions in the U.S. then that will become a bigger and bigger percentage of our business. But being acquisitive it’s still pretty small, if you think about 72% roughly of our sales are in the United States. But it’s starting to have a material impact and you saw really an outstanding quarter in Q4.

Matthew O’Brien: Got it. Thank you.

Operator: Thank you. Our next question comes from Vijay Kumar with Evercore. You may proceed.

Vijay Kumar: Hi, guys. Thanks for taking my question and congratulations on a really strong finish year. Kevin, maybe the first one on the performance here in the fourth quarter, at least organic, that’s quite outstanding. Sequentially, it looks like your growth accelerated by 350 basis points. Is this — can you put some — put those numbers in context for us? Is this share gains or is this your supply chain situation improving? And I am assuming there was some headwind from China, maybe if you could quantify it and just help us understand what went into that pretty stellar 13% number in the fourth quarter?

Kevin Lobo: Yeah. Look, I think, the outsized growth is in the Medical division, right? So Medical division isn’t going to typically grow 26% organic, right? That’s outsized and that’s really, let’s call it, making up for supply. So they had huge orders and we were able to get healthy in some of the product lines and we were able to get a lot of shipments out the door. That kind of variability could happen from quarter-to-quarter. But if you look at a full year kind of organic growth rate, Instruments 10%, Endoscopy 15%, Medical 11%, kind of on a rolling four-quarter basis. Those are really outstanding results. So it’s not a one quarter wonder. I would kind of look at the overall year having organic growth of 9.7%. That’s the highest I have had in my tenure.

And we have new products, I would say, they are as good a set of pipeline as I have had since I have been in this role. So that bodes well for next year. We are starting with the highest organic growth guide that we have ever started with and assuming launches go well and everything, this should be another very, very strong year. I think you will see a little bit of volatility quarter-to-quarter primarily with Medical, because they do have the largest backlog of all the divisions in the company and a more consistent performance with the implants side of the house.

Vijay Kumar: Understood. And maybe off of those comments, Kevin, and maybe perhaps for Glenn as well, that 7% to 8.5% guide for fiscal 2023, is that a front-loaded guidance? Just when I look at the comps here for 2022, is that so 8.5% front-loaded? And what is it assuming for supply chain, are you assuming supply chain to improve just given off of Q4 levels? And the order that you mentioned, Kevin, did that backlog grow versus third quarter or are we starting to work down on the backlog?

Glenn Boehnlein: Hi, Vijay. I will take some of these. If I miss a part, you can correct me. First of all, the growth is not front-end loaded. It’s pretty steady throughout each of the quarters and you will see that there is going to be solid growth just given sort of the momentum that we are feeling from fourth quarter. In terms of the order book, we exited 2022 with an increase in the order book year-over-year. So we are actually feeling very bullish about capital sales, about our customer’s willingness to buy capital. So we don’t — we feel like that’s a great tailwind for the whole year and did I miss the third part?

Kevin Lobo: No. I think you probably

Glenn Boehnlein: Yeah. Okay.

Vijay Kumar: Sorry, on the supply chain situation.

Glenn Boehnlein: Yeah. As I mentioned, we assume that we will see gradual improvement in the supply chain. We saw some of that in Q4. We actually feel pretty good about our access to supply, we are seeing a reduced volume of spot buys, which are those really high cost items and we are also beginning to work with our original set of vendors and also going up the food chain and actually working with chip suppliers so that we feel like we have a good handle on what’s going to happen with supply chain, but it should become better quarter-to-quarter-to-quarter with good improvement and visible improvement in the back half of the year.

Vijay Kumar: Understood. Thanks, guys.

Kevin Lobo: Thank you.

Operator: Thank you. Our next question comes from Shagun Singh with RBC. You may proceed.

Shagun Singh: Great. Thank you so much for taking the question. I was just wondering what you have assumed for margin expansion in 2023 relative to your at least 30 basis points of outlook that you previously shared. And then I was wondering if you could talk a little bit about the VCON business in hips and knees. In knees, your major competitor does have a new cementless launch. Do you see that as a price mix benefit for them or something that could drive competitive account conversion, and then on hips, it came out stronger than what we were expecting. I was just wondering if you could talk a little bit about the drivers and if we could see meaningful share gains on the hip side, similar to what we have seen in knees? Thank you for taking the questions.

Glenn Boehnlein: Yeah. Yeah. Great question. I will start out and just touch on the margin expansion. We typically do not guide on op margins. So we are not going to pinpoint an expansion number. I think backing up from EPS and looking at tax and OI&E and where we are with sales that, you will see that the math doesn’t work unless we expand op margin. So I think what you will see is a progressive improvement each quarter in that expansion, especially as the comparable includes inflation from the prior year, so that’s what our plan is.

Kevin Lobo: Yeah. And related to joints, obviously, we are delighted with the year that we have had in both hips and knees. Having global double-digit growth in both hips and knees is terrific. The hip strength clearly driven by the launch of the Insignia Hip Stem, and as a reminder, we are only about a little less than halfway through that launch. So we still have a lot of sets to get out. It will take us all of this year and maybe into a little bit of the first quarter of 2024 to be fully launched with Insignia. So we are still kind of in the gaining momentum mode with Insignia and that’s coupled with the 4.1 Mako hip software. So we can — we expect hips to continue to be very strong. As it relates to knees, clearly, that’s been an outperformer for us for the past six years, seven years since we launched the Mako Total Knee application.

And with cementless, where we continue to gain, I am not at all worried about competitive entrants on cementless. People aren’t going to move away from our cementless for a competitive product when we have tremendous proven, Jason mentioned, 1 million procedures already done and competitors just starting to launch theirs. They are going to be awfully very cautious before they move to another product on something like that and that synergy with cementless and Mako is really significant. Last thing I’d say is, we are launching new software, just like we did with hip with the 4.1, we call it, TKA 2.0 Mako software. We have just — we are in the middle of a limited launch. It’s going exceptionally well. We expect the full launch sometime by around Q3 of that new software upgrade, which creates better user experience, better for training residents and teaching hospitals, so very, very good feedback on that.

So we do expect to continue to outperform in both knees and hips again in 2023.

Shagun Singh: Thank you for the color.

Operator: Thank you. Our next question comes from Ryan Zimmerman with BTIG. You may proceed.

Ryan Zimmerman: Hey. Thanks for taking the questions. Not to take away, this is a really good quarter, Kevin, but I do want to ask about two segments that are maybe a little softer than expectations. Neurovascular and Spine, both come on the back of what I think what we would consider easier comps and you can probably challenge me on that. But what are you contemplating in terms of your guidance for growth in those areas for 2023, and just commentary on both the Neurovascular and the Spine segment this quarter and kind of what impacted results?

Kevin Lobo: Yeah. No. Certainly, on the Neurovascular comps, I — we did have pretty good performance a year ago in Neurovascular. I think that the challenge is kind of looking at versus the prior year Neurovascular and then going back versus 2019. So, but certainly, we have had our challenges with Neurovascular in the U.S. We have had continued good growth outside the United States and I think I have mentioned on prior calls that the ischemic market segment has certainly gotten softer. There are a lot more competitors that are kind of distracting and taking up time. We still think it’s a great market. There’s still a lot of patients that are — that have not been treated. We are only treating a small percentage of people that have these large vessel occlusions in the brain.

So we do think it’s a good long-term market. We are launching a new coil called Tetra Coil here in the United States, which is exciting. And we will continue to invest. We have a deal that’s pending. Obviously, regulatory clearances before it closes on a one and done for the hemorrhagic segment. We are very excited about that. acquisition. That will give us another shot in the arm. So, yes, we have had our challenges in the U.S. this year. We continue to grow very well outside the United States. It’s still a market we are very committed to. That’s kind of on the Neurovascular side. On the Spine side, look, the launch of Mako Spine is going to be critical. The Q Guidance launch is going very well and that was important for us. We had a gap, obviously, with enabling technologies, which is really important in the Spine segment.

So I do believe this is, 2023 will be a year where we will continue to grow kind of around the market growth rate and then really get ready for the Mako launch to be able to start to grow above market. So, yes, they are not as glowing, the divisions, right now as some of our other divisions. But they are certainly competing well in the marketplace, growing roughly in line with the market, maybe a little bit below, but still highly profitable, highly important businesses to the long-term future of Stryker.

Ryan Zimmerman: Very helpful. And then if I could just ask a follow-up. I mean this was the first time you really, I think, put those time lines out on spine and shoulder. We have kind of danced around these topics for some time. What is it now that’s a comfort to put those out there and ensure that those will be on time with the time lines you outlined?

Kevin Lobo: Yeah. As a company, we tend to be pretty conservative on getting time lines and robots are hard, right? Ask any of the companies who are trying to launch robots, whether they are in heart tissue robotics or soft robotics. Robots are difficult. What gives us confidence is our prototypes are built. We have tested it with surgeons. We have gotten feedback. We have had some meetings in one case with the agency to get an idea on the regulatory pathway. So we have enough in the pipeline right now. There’s always a little bit of uncertainty around approvals and full launch. And notice the term I used was initial launch, right? So we do expect to get approved and to start doing cases. But then as you do those initial cases, you might have to refine some of the training and things, so it might be a little bit slow out of the gate, we will see.

The beauty of our approach is it’s the same robot that’s being used for hips and knees that’s going to be used and we have, as you know, thousands of them now out there. So that is exciting that we will be able to just do a software upgrade and have a different attachment and be able to use the same robot and I think a lot of hospitals will be excited about that if the robots not being used on one day of the week and they can have that being used for spine initially and then as the demand increases, then they can have a dedicated robot for spine. So we really believe that will be different than when we started where each robot had to sort of justify it on its own. Having one sort of robot with all these different applications will be powerful over time.

But we feel confident just based on we spent a lot of money, and we spent a lot of time on this. The shoulder one took a little longer. As you recall, we were — we thought that was initially going to be before spine, but we decided to move away from our implants to the Tornier implants and to use the BLUEPRINT planning software. So that caused a slight delay. But the teams are really working well and we are — the feedback we are getting from surgeons that are seeing it is extremely positive.

Ryan Zimmerman: Great. Looking forward to it. Thank you for taking my questions.

Kevin Lobo: Yeah. We are too.

Operator: Thank you. The next question comes from Vik Chopra with Wells Fargo. Your line is open.

Vik Chopra: Hi. Thanks for taking the question. This is Vik on for Larry Biegelsen. Kevin, you talked about a super cycle of new products. Just remind us sort of what they are and how we should think about their impact in 2023. And my second question is, maybe just a comment on your trend in China, sort of what are you seeing there and maybe just the impact on Neurovascular, any color you could provide would be helpful? Thank you.

Kevin Lobo: Okay. There’s a few questions in there. So I will do the super cycle and then I will pass it to Jason for China. On the super cycle, so System 9, our new power tool and Instruments launched just at the end of last year. So we are going to see the first real year of impact here in 2023, initial feedback, extremely positive. We know how to do these. As you know, we have — from System 6 to 7 to 8 to now 9. So that’s one of the flagship product. We have the 78 camera in Endoscopy that will be initially launched in Q2. We will probably see more of a pickup in Q3, Q4, but a fabulous new camera, which, as you know, we have done in the past, whether it’s 14, 15, 88, 68. So these are things we know how to do and these are fabulous products.

We have Neptune S, which is a small footprint Neptune product designed really for GI that is terrific new market for us. So we — today Neptune’s are not really being used in GI. It’s designed special purpose for that to catch the polyps. Nurses are going to absolutely love this. We actually believe it could increase the procedures that they can do in a day, which, of course, the GI teams are going to love. So that’s also another really powerful product that we are excited about. Towards the end of the year and won’t have a big impact in 2023, but certainly much more in 2024 is going to be a new defibrillator. It will be in 2023 outside the United States and then early in 2024 inside the United States, which is the big pre-hospital expensive, complex life pack defibrillator.

So that — those are three big flagship products that’s very rare to have them all within kind of an 18-month period. That’s a super cycle. But beyond that, obviously, Insignia product is going to continue to launch. We have the CD Next product, which allows for depth perception as you are drilling. We have Signature 2 in the — which is launched just this year, which is going to have a full effect next year in neurocranial, which is for neuro power drills. And I could list another whole bunch of foot and ankle products. We have got products in the shoulder space. So it — there’s a full, full list of products. But those big ones I mentioned are that’s what I call it a super cycle is, you normally have one of those every two years or three years, not all in a short compressed timeframe.

You have got the ProCuity bed that’s continuing to get rave reviews and that’s kind of still in the early phases of its launch. So, as healthy as I have had in my time here at Stryker in terms of new product cadence. On China?

Jason Beach: Yeah. Vic, as it relates to China, as you all know, right, China, as it relates to total Stryker less than 2% of our sales. So even as you consider some of the lockdowns and things in 2022, immaterial to our results in terms of Q4. Then as you think about 2023, early days as it relates to Neurovascular VBP. We are certainly keeping an eye on that and as we think about Q1 and the full year of 2023, when we get to the next earnings call, if there’s anything material to disclose, we will certainly do it at that time.

Operator: The next question comes from Matt Miksic with Barclays. You may proceed.

Matt Miksic: Yeah. I just wanted to maybe get a sense and I know we could spend a lot of time talking about the many things that are going well and could go really well this year. But just a follow-up on Spine, the investment in the robot is significant, the portability of that hardware and upgrading the app, as you described, Kevin, is great. Between now and then, whether it’s Q Guidance or whether it’s implant launches or system launches or investments that you are making, can you talk about maybe anything that you would see as kind of gradually driving up momentum in that business as you head into — as you get into that introduction of the robot next year?

Kevin Lobo: Yeah. Yeah. Sure, Matt. So, certainly, we can’t just wait only for Mako and I’d tell you that Q Guidance has actually exceeded our expectations. Customer feedback has been excellent on that and the sales of those systems have been terrific. We also have a bunch of distribution deals that we have entered into for expandables, for different products, so two or three of those. We have the Monterey new product as well with Tritanium, which is pretty exciting. So it’s — we do have a, what we will call it a cadence of new products planned that will be either developed by Stryker or through distribution to help fill product gaps. I am pretty excited we have our sports medicine leader, Andy Hamel, who’s the Head of R&D, has moved over to Spine.

And if you look at the last decade, our sports business was the fastest launcher of products across all of Stryker and I think he will give that team a big shot in the arm. He moved over kind of midway through last year and excited to have him as part of the team. As you know, we have made other changes within our management team and I am pretty bullish on their prospects for the future. So we won’t sit on our hands and just wait. And already, some of those products, even the Life Spine distribution deal, those kind of products are really helping that, I was at the Spine Sales Kickoff meeting for the year. The momentum is really strong. The teams are feeling good about the future and knowing that Makos coming, of course, helps a lot. But, yeah, it’s going to be — it’s a tough market, as you know, and it has been a tough market for a long time.

But I feel like the combination of this distribution filled we will call gap-filling products, as well as some new products that we have planned, should put us in a pretty good position even prior to the launch.

Matt Miksic: That’s excellent. Thanks so much.

Kevin Lobo: No problem.

Glenn Boehnlein: Thanks, Matt.

Operator: Thank you. The next question comes from Pito Chickering with Deutsche Bank. Please proceed.

Pito Chickering: Hey. Thanks for taking my question. Can you guys hear me?

Kevin Lobo: Yes. We can.

Glenn Boehnlein: We can.

Kevin Lobo: Thank you, Pito.

Pito Chickering: All right. Great. So pre-COVID, the first quarter is about 23% of the annualized EPS. So with the commentary on no EPS growth for first quarter 2023, it looks like you guided about 20% of annual EPS. I understand the hard inflationary comps in 1Q, but why should 1Q be underweight the annual EPS number versus recovered years or should we take this as just back half margin expansion for 2023?

Glenn Boehnlein: Yeah. I think you are astute in your numbers. Definitely, it will be back half margin expansion for 2023. So you are right, we will see relative flat EPS in the first quarter, and then obviously, meaningful expansion starting in Q2, but really accelerating in Q3 and Q4 to drive to the EPS that we guided.

Pito Chickering: Okay. And then just a quick one here on capital outlook, your commentary is very bullish. Can you just quantify us what the new orders in fourth quarter of 2022 were and how it compared to the fourth quarter 2021? Thanks so much.

Jason Beach: Hey, Pito. It’s Jason. We won’t quantify in terms of what we have from an order book perspective. But I would just point back to, I think, what Glenn said earlier around and maybe it was Kevin. But the order book, as we exited 2022 is even larger than when we exited 2021. So we continue to be quite bullish on the capital side as we enter the New Year.

Glenn Boehnlein: Yeah. And that’s not a new commentary. So the last four months, I think, our commentary has been very consistent on capital. Our hospitals having challenges with their P&L and in some cases, sure, it’s not yet — we are not seeing it in orders. We are not seeing any cancellation of orders. Are some projects being delayed here and there? Sure. But it really is not having any kind of material impact on our outlook for capital. Again, a lot of our capital is revenue-producing type of capital. So you wouldn’t expect any kind of slowdown. But even the large capital area, if I look at our communications business within Endoscopy, had a fantastic year, helped drive some of the Endoscopy growth and they have a terrific order book going into next year and that’s large capital that sometimes in prior recessionary cycles have been deferred. So we just aren’t seeing it yet. So that gives us optimism to kind of lean in on the growth for at least for 2023.

Pito Chickering: Great. Thanks so much.

Operator: The next question comes from Steven Lichtman with Oppenheimer. Your line is open.

Steven Lichtman: Okay. Great. Just on growth in the quarter, one of the factors you pointed to, Kevin, was procedural volume recovery. One of the factors discussed, obviously, throughout 2022 on in terms of capturing those procedures was hospital staffing. Are you starting to see an easing of that factor, any color you are seeing in terms of that here in the U.S. would be helpful?

Kevin Lobo: Yeah. Look, there are flashpoints where you do see staffing as a challenge, but the hospital systems are getting better at dealing with it. And we saw through from September through to the end of the year, kind of a nice building of procedure and a steady kind of high volume. The demand is clearly there. There’s no question that there’s some pent-up demand and surgeons are booked out for a good three months, four months in general. And so we are seeing, I would call it, a nice, steady kind of improving trend and I think we will see a moderate tailwind throughout the rest of this year. These flashpoints tend to be very short and even in some of the — if you look in Europe and some of the areas that had strikes and real causes for worry, they have kind of come and gone pretty quickly. And so we are feeling good about the outlook on a procedure standpoint and expect this to be a tailwind throughout the year.

Steven Lichtman: Got it. Great. And then, Glenn, just real quickly, I know you don’t want to provide specific margin guidance. But relative to inflation, did you call out or could you talk about what the impact was to gross margin in 2022 from inflationary headwinds and generally either directionally or specifically what you are looking for in 2023 on that front?

Glenn Boehnlein: Yeah. I think as you think about inflation, obviously, we felt the impact of the inflation numbers in the — that were in Q3, especially that were very large. A moderation of that, I would say, occurred in Q4. But keep in mind, to the extent that we purchased raw materials or made inventory, those inflated raw material prices, that’s capitalized in our inventory. The other place that we will feel inflation and that it carries over to in this year is really going to be labor costs that went up that are baked in now solidly for the year. We are still experiencing a pretty high inflation in our freight and transportation costs. Energy costs, especially in Europe, now have inflation baked into them, we will feel it there.

I think what we are thinking, though, is we are not — as we look at 2023, that we are not thinking that inflation will continue to be at the levels that it was showing in 2022. So we are feeling that, that will moderate and that’s what’s included in our guidance.

Steven Lichtman: Sure. Understood. Thanks, guys.

Kevin Lobo: Thank you.

Glenn Boehnlein: Thank you.

Operator: Thank you. Our next question comes from Drew Ranieri with Morgan Stanley. You may proceed.

Drew Ranieri: Hi, everyone. Thanks for taking the questions. Kevin, just for you to start. You have — we have talked about the capital order book being stronger year-over-year. But can you maybe talk a little bit more specifically of what you are seeing in the hospital versus in the ASC setting? Any noticeable trends in — even in procedures in the ASC as you are entering 2023? And then I have a follow-up.

Kevin Lobo: Yeah. So, clearly, this trend towards procedures being shifted to the ASC is continuing. It really accelerated during the pandemic, but there’s no signs of that slowing down. Even if I look at our Mako installations, I would say, this year, it’s a record number in the ASC setting. So as procedures move to the ASC, they certainly want to use great technology and I don’t think that’s going to slow down. We are going to — every hospital system you talk to has construction plans around ASCs and so I think that’s just an undeniable future trend. Obviously, that takes — it will take time to build out more and more capacity, but we saw that increase in Q4 versus Q3, which increased versus Q2. So it’s just a steady gradual trend and I am talking mostly about hip and knee replacements, but we are also seeing even some spine procedures being done in the surgery centers to shoulders.

And I just don’t think there’s any slowdown, it’s just going to continue over the next few years.

Drew Ranieri: Got it. And then just for Glenn, you talked about the margin expansion for 2023. Could you maybe just highlight kind of what you are expecting for free cash flow generation, 2022 is obviously a tough year? It sounds like inventory will get better in the back half, but just any broad-based thoughts on free cash flow for 2023? Thank you.

Glenn Boehnlein: Yeah. I think as you think about the biggest contributor to cash flow, honestly, it’s earnings. So as we see progressive improvement in earnings throughout the year, I think, we will see that carry over into cash flow. There are some things that were maybe one-offs that we felt that we hope will get better in 2023. That bolus of AR that we had at the end of the year in 2022, obviously, we will collect that and kind of get back to a regular cadence of DSO. And then, finally, as inventory costs moderate and we feel more confident about supply, we will draw down on some of the safety stocks that we had pre-buy. We will also see just lower cost of inventory in raw materials and that should carry over to cash flow, too.

And then the other area that I would highlight that maybe doesn’t get a lot of attention is, we continue to work on our AP and AP days, and we have made incredible improvements over the past two years to three years in terms of working with vendors and pushing AP out to beyond 70 days and we will continue to work on that as well. So I think all of that bodes well for cash flow improvement. But generally, I think, what you will see is as you see progressive improvement in earnings. You will also see cash flow fall out.

Operator: Thank you. Our next question comes from Michael Matson with Needham & Company. You may proceed.

Michael Matson: Yeah. Thanks for fitting me in. I guess I want to ask one on M&A. So I think you called out that you would be looking to do some more tuck-ins. What are you seeing out there with regard to the valuation expectations from potential targets? It seems like there was — in the past year, there’s been sort of a disconnect between what the buyers are willing to pay and what the sellers want. I mean is that starting to get more realistic now and just maybe you can just comment generally what you are seeing there in terms of deal flow?

Kevin Lobo: Yeah. But there’s, obviously, the stock market reaction over the last year on companies that weren’t making profits was pretty harsh. And it takes time for that, let’s call it, a new reality to set in with people that want to sell. But as a company that is acquisitive and has been acquisitive over time. This could bode well for us over the next couple of years if valuations kind of stay at this level. Obviously, the tuck-ins that — a lot of the tuck-ins we do tend to be private companies, not necessarily publicly traded companies. But we have an active list of companies that we look at. We are focused also on paying down debt, given that we took on a lot of debt for Wright Medical and Vocera, so that’s kind of job one.

Let’s continue to keep paying down that term loan. We still have about $850 million left on the term loan. We want to pay that down. But if we see good opportunities and there of the tuck-in nature, we aren’t going to wait, we will make sure we do that. We can do two things at the same time and continue to pay down debt, but also do some small tuck-ins. And so the divisions are actively pursuing those and we will be ready to strike if the prices are right. But I think this pricing environment is going to be positive. Now profits do matter and there was sort of a period of time where a lot of companies run away from us, to be honest, just on valuation, given that they were growing fast and the valuations were just out of sight. And we just won’t pay just whatever for something, even if we like the technology, we have to make sure it’s going to meet financial returns.

So thanks for the question. We will continue to look and sort of thread the needle between paying down the debt and then being opportunistic where we can.

Michael Matson: Thank you.

Operator: Thank you. Our following question comes from Joanne Wuensch with Citi. You may proceed.

Joanne Wuensch: There is a moment when you were rattling off, rattling maybe the wrong word, all the different growth in MedSurg and Neurotechnoology. And I could not get my head around some of these numbers and I am just sort of curious and maybe this has been addressed. How did this happen? Was this some level of pent-up demand in the capital equipment cycle, was it just the end of the year people have money in their budgets may want let go. Help me understand what this is and do you expect there to be more of a depleted effort in the beginning of this year?

Kevin Lobo: Yeah. Look, Joanne, one of the great news about this quarter. First of all, it felt like a pre-pandemic record quarter is the way I describe it, where our sales teams were kind of firing the way they normally do at Stryker. You have seen in the past and you have been covering us for some time. Having a big fourth quarter is not new for Stryker. We have had big fourth quarters many, many, many times. Our teams know how to finish. They chase their numbers. Our hospitals also kind of want to use up some of their budgets if they are on — depending on their calendar cycle that they are on. And so that’s not new. What’s really exciting is that we were able to dig out of some of the backlog, specifically in medical, but not deplete.

These are not pull-forward sales. We still have strong orders. We still have a growth momentum that’s going to continue next year and that’s why you saw such a, I would say, positive guide on organic sales growth. We are not calling for a soft Q1, and I think, Glenn even in the Q&A mentioned that we are not calling for a soft topline in Q1. Our implant businesses are continuing to hum. And these businesses are just their special businesses. We have these dedicated business units. We have split them many times. If I look at within Instruments, Instruments had 10% organic growth in 2022 and that’s because we decided to split orthopedic instruments and circular technologies a few years ago and they are both growing extremely well. They both have new products, right?

We have a new Neptune and we have a new power tool. In the old days, it was the same rep trying to sell both of those. Now we have different reps selling them. So our ability to scale those launches is so much better with specialization and dedication. That’s kind of our formula, our growth formula and that’s just — it’s absolutely happening in our company. So our leadership teams are terrific. Our dedicated e-business units are firing and the products are flowing. So I expect more of the same. But if you look back, even going back to 2016 as I mentioned before, and if you look at the kind of organic growth, it’s of these three divisions, Instruments and Ortho and Medical, not to mention Neurocranial, which has been an absolute home run, right?

And that’s really run by instruments, but we report it separately. They are growing every year, 8%, 9%, 10%, 11%, 12%. That’s not unusual. And now that they have — when you have new product launches that tends to be on the higher side of it. So, yeah, it’s a good point to be a Stryker right now, especially in those businesses.

Joanne Wuensch: If I may, you do discuss new product cycle a couple of times. You have got a new power tool. You have got a new Neptune. What else would you like to highlight?

Kevin Lobo: Yeah. I mentioned before the camera, so in Endoscopy, a new camera. That’s big sort of blockbuster flagship product. Sports Medicine has a number of new shoulder products that they are launching. Those are — but that sort of helps fill out the bag. At the end of the year, we have the new defibrillator within our Emergency Care business. They launched a new — I didn’t even mention they launched a new power chair at the beginning of this year. So if you want to go up in these apartment buildings, we now have a powered chair, which is fabulous. It’s called Expedition. I didn’t even mention that one. I mean it’s just — there’s no end. I mean we have invested pretty heavily in R&D over the past four years, five years, six years, seven years and spending close to 7% of sales and the new products are flowing. So those are — I mentioned a couple of other ones before, Joanne, but that hopefully is a good look for you.

Joanne Wuensch: It is. Thank you so much.

Kevin Lobo: Thank you.

Operator: Thank you. Our next question comes from Eric Anderson with Cowen. Please proceed.

Eric Anderson: Hi. This is Eric on for Josh. Can you guys hear me?

Kevin Lobo: Yes. We can.

Glenn Boehnlein: Yeah.

Eric Anderson: Excellent. Maybe thinking about cementless knees. I think about half of your knees are now going in cementless, correct me if I am wrong there. Where do you think that rate could be exiting 2023 and then maybe thinking longer term, what portion of your needs do you think will ultimately be cementless?

Kevin Lobo: Yeah. It’s a great question. So we — we have now — we exited the year over 50% in the U.S. on our knees being cementless. The rate does vary in other countries of the world, but it’s been a steady climb, frankly. They are going to be more conservative on cementless than hips just because it’s weight-bearing versus hips. And do I think it will get to close to 100 like hips? Probably not, just because of bone quality, because it’s weight-bearing. But we have not seen a slowdown. It’s been just this kind of steady march. If you recall a few years ago, it was kind of 30%, then it moved up to 40%, now it’s north of 50% now and I think you will just continue to see that kind of steady climb. Where we will end, I don’t know.

It’s hard to predict, but probably somewhere in the 70%s is kind of what I would — I think it will. So there’s still room to run on cementless, and obviously, we have a proven system that’s delivering terrific long-term results, given that we have done 1 million of them already.

Eric Anderson: Understood. Thanks for that. And apologies if I missed it, but are there any selling day impacts in 2023 that we need to consider?

Kevin Lobo: Yeah. There’s one extra selling day, one less selling day in Q3. But for the full year, it’s the same number of days.

Eric Anderson: Okay. Understood. Thank you.

Kevin Lobo: Okay. Thank you.

Operator: Thank you. And our final question comes from Eric Fleming with Raymond James. You may proceed.

Eric Fleming: Hey, guys. Eric on for Jayson from Raymond James. A quick question on your pricing outlook, are there any segments that have a particular impact or is it across all? Thank you.

Glenn Boehnlein: Yeah. The — obviously, the segment that has the biggest impact is really our MedSurg businesses. We saw Q4 pretty much all positive pricing impacts across MedSurg and so we expect that to continue into 2023. I mean that being said, on the Ortho side, there’s a lot of work around contracts and structures and rebates, and so we are seeing good momentum there as well on pricing. I think the other thing to keep in mind is that, pricing is legacy product over legacy product and so to the extent that we have these product launches, like Kevin was talking about, we generally will launch with premium pricing over the legacy product, but it won’t be included in that pricing statistic. It really gets included in volume. So net-net, I think, you will see probably more favorable pricing coming out of the MedSurg businesses, but we are making great progress on the Ortho side, too.

Operator: Thank you so much. There are no further questions. I will now pass it back over to Kevin Lobo for concluding remarks.

Kevin Lobo: Okay. Great. So, first of all, I want to thank all of you for your patience working through our technical challenges. As you can see, we had a terrific finish to last year, a really good start this year and had a chance to be out with our sales teams across Stryker and I could tell you the momentum is palpable. It feels like it’s going to be a strong year. We, obviously, have — are going to continue to have some challenges around spotting this in the supply chain, but it certainly feels like the worst is behind us as we experienced last year. So I want to thank you all for joining our call. We look forward to sharing our first quarter results with you in April. Thank you.

Operator: This concludes the conference call. Thank you for your participation. You may now disconnect your lines.