Welcome to the Third Quarter 2023 Stryker Earnings Call. My name is Krista, and I'll be your operator for today's call. 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 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.

Welcome to Stryker's third 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 and some other product updates. Glenn will then provide additional details regarding our quarterly results before opening the call to Q&A. Before I discuss the quarter, I would like to address the concerns around GLP-1 and what is being misunderstood. Our knee business is not at risk for a slowdown. There is an oversimplification taking place as it relates to the relationship between weight and knee replacements. This ignores the more important aspects of activity level and genetics. We are, in fact, optimistic about the positive impacts of these drugs in both the short term and the long term. In the short term, it will help to make ineligible people eligible for surgery sooner. And in the long term, it will likely lead to more surgery as people increase their activity levels. With that said, the rate and persistence of adoption of these medicines is still a large unknown as there are significant barriers to this taking place. Lastly, as a reminder, we have a very diversified business, with knees representing about 10% of our sales. Now moving to our third quarter results. We delivered strong organic sales growth of 9.2% against last year's nearly 10% comparable despite one less selling day versus 2022. This performance included double-digit growth in MedSurg and Neurotechnology and high single-digit growth in Orthopedics and Spine, reflecting a sustained robust demand environment and our team's strong commercial execution. Our results were strong across the globe with high single-digit growth in both the U.S. and international markets. In addition, we remain focused on our pricing initiatives, once again realizing positive overall price. We delivered quarterly adjusted EPS of $2.46, reflecting a 16% growth compared to the third quarter of 2022. This result was primarily driven from the strength of our sales but also demonstrates continued margin recovery. Finally, we are narrowing our expectations for 2023 to the high end of our previously provided guidance ranges and now expect full year organic sales growth of 10% to 10.5% and earnings per share of $10.35 to $10.45 per share. Coming off full year 2022 organic sales growth of nearly 10%, a 10-plus percent organic sales growth in 2023 reflects the strength of our innovation, our team's sustained high performance, and we are encouraged by an important step in our margin improvement this year. I will now turn the call over to Jason.

Thanks, Kevin. My comments today will focus on providing an update on the current environment as well as capital demand, including Mako and an update on product launches. Procedural volumes remain strong, and we continue to expect patient backlog will support elevated orthopedic procedural demand through 2024. And while hospital staffing pressures and supply constraints continue in pockets around the globe, these challenges are resolving gradually and will continue to be a tailwind through the end of the year and into 2024. Demand for our capital products remained healthy in the quarter with double-digit organic growth in our Endoscopy and Instruments divisions. Our capital order backlog remains consistent with Q2 and elevated well above normal levels. Also, demand for Mako remains robust with strong U.S. and international installations, which will continue to drive our hips and knees business. Next, our product super cycle continues to drive positive momentum. In Q3, our 1788 camera platform moved to its full launch, which is gaining traction in the market and driving strong order growth. In addition, we received 510(k) approval for our Pangea plating system in our Trauma and Extremities division. Pangea will be the largest launch in trauma's history and is a very comprehensive system that will facilitate complete hospital conversions. We are gearing up for a full launch in the second quarter of 2024. We have also extended the capabilities of our Vocera platform to now be compatible with our newly approved Prime Connect stretchers, the first wireless stretcher on the market. This wireless feature can be added to existing and new stretchers and will help address patient safety in the emergency room setting. These launches will continue to support our growth for multiple years. Our Mako spine and shoulder applications are on track, and we've received positive feedback from surgeons who have been exposed to the technology. As a reminder, on November 8, we are hosting our Investor Day with the theme: Delivering Leading Growth, which will be webcast live on the Investor Relations page at stryker.com. We will have prepared remarks from numerous leaders across Stryker, followed by a guided product tour for those attending live. We will showcase several of our exciting product launches with investors and analysts having the opportunity to interact with many members of our leadership. We're excited to provide our priorities and expectations for Stryker in the coming years. With that, I'll now 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 9.2% in the quarter, the third quarter of 2023 had one less selling day than 2022. The impact from pricing in the quarter was favorable by 0.3%. We continue to see a positive trend from our pricing initiatives, particularly in our MedSurg and Neurotech businesses, almost all of which contributed positive pricing for the quarter. Foreign currency had a 0.3% favorable impact on sales. In the quarter, U.S. organic sales growth was 9.3%. International organic sales growth was 8.9% and impacted by positive sales momentum across most of our international markets, particularly Australia, Europe and emerging markets. Our adjusted EPS of $2.46 in the quarter was up 16% from 2022 driven by higher sales, operating margin expansion and a lower adjusted income tax rate, partially offset by the impact of foreign currency exchange, which was unfavorable by $0.02. Now I will provide some highlights around our quarterly segment performance. In the quarter, MedSurg and Neurotechnology had constant currency sales growth of 10.3% and organic sales growth of 10.1%, which included 10.9% of U.S. organic growth and 7.4% of international organic growth. Instruments had U.S. organic sales growth of 17.3%, with strong double-digit growth across both its Surgical Technologies and Orthopedic instruments businesses. From a product perspective, sales growth was led by Power Tools, SteriShield Waste Management smoke evacuation and surgical account. Endoscopy had U.S. organic sales growth of 10.6% with strong double-digit growth in its communications and sustainability businesses. In September, the Endoscopy business continued its full launch of the 1788 camera system, which provided strong sales momentum at the end of the quarter. Medical had U.S. organic sales growth of 5.7%, led by performances in its emergency care and staged businesses and was impacted by a strong comparable growth of almost 14% in 2022. Medical continues to have a large backlog of capital orders, and we expect a solid Q4 despite a huge Q4 comparable. Neurovascular had U.S. organic sales growth of 8.7%, reflecting a strong performance in our hemorrhagic business. Neurocranial had U.S. organic sales growth of 14.5%, which included double-digit growth in all three business units, neurosurgical, CMF and ENT. Internationally, MedSurg and Neurotechnology had organic sales growth of 7.4% and reflected double-digit growth in our instruments, endoscopy and neurocranial businesses. Geographically, this included strong performances in Australia, Europe and most emerging markets. Orthopedics and Spine had both constant currency and organic sales growth of 8%, which included organic growth of 6.9% in the U.S. and 10.6% internationally. Our U.S. knee business grew 5.3% organically, which reflects our market-leading position in robotic-assisted knee procedures. Our U.S. hip business grew 3% organically, reflecting solid primary HIF growth fueled by our insignia hip SAM. The growth for both our knee and hip businesses reflects one less selling day in the quarter and a very strong comparison in 2022 of 12.4% for hips and 14% for knees. Our U.S. Trauma and Extremities business grew 11.5% organically with strong performances across all businesses, led by upper extremities and foot and ankle. Our U.S. Spine business grew 5.4%, led by the performance of our enabling technology and Interventional Spine businesses including the recently launched Q guidance navigation system. Our U.S. other ortho increased organically by 1.8% due to higher Mako placements in the quarter. Internationally, Orthopedics and Spine grew 10.6% organically, including strong performances in Australia, Canada and most emerging markets. Now I will focus on operating highlights in the third quarter. Our adjusted gross margin of 64.7% was favorable, approximately 210 basis points from the third quarter of 2022. This improvement was primarily driven by the easing of certain cost pressures that we experienced in 2022, decreases in spot buys and the benefit of price and mix. Adjusted R&D spending was 6.8% of sales, which represents a 30 basis point decrease from the third quarter of 2022, primarily due to a higher comparable in 2022 related to the ramping of costs for product launches. Our adjusted SG&A was 34.5% of sales, which was 140 basis points higher than the third quarter of 2022 due to continued investments, including sales growth incentives and a more normalized cadence of travel and meetings. We expect our full year SG&A as a percent of sales to be in line with 2019 levels as we continue to invest for growth. In summary, for the quarter, our adjusted operating margin was 23.4% of sales, which was approximately 110 basis points favorable to the third quarter of 2022. This performance is driven by the aforementioned easing of certain cost pressures, primarily on gross margin. Adjusted other income and expense of $61 million for the quarter was slightly higher than 2022, driven by increased interest expense, partially offset by higher interest income. The third quarter of 2023 had an adjusted effective tax rate of 13.2%, reflecting the impact of geographic mix and certain discrete tax items. For 2023, we now expect the full year effective tax rate to be approximately 14%. Focusing on the balance sheet. We ended the third quarter with $1.9 billion of cash and marketable securities and total debt of $12.7 billion. During the quarter, we paid down $100 million of debt. Turning to cash flow. Our year-to-date cash from operations is $2.2 billion, this performance reflects the results of net earnings and higher accounts receivable collections. Considering our year-to-date results, our robust backlog for capital equipment and continued positive procedure trends, we now expect full year 2023 organic sales growth to be in the range of 10% to 10.5%. We expect pricing to be slightly positive for the full year. If foreign currency exchange rates hold near current levels, we anticipate sales will be unfavorably impacted by approximately 0.6% and adjusted EPS will be unfavorably impacted from $0.10 to $0.15 per share for the full year, both of which are included in our guidance. Based on our performance in the first nine months of the year, together with our strong sales momentum, we now expect adjusted earnings per share to be in the range of $10.35 to $10.45 per share. And now I will open up the call for Q&A.

The first question comes from Larry Biegelsen with Wells Fargo. Sir, you may begin.

Congrats on another good quarter here. Kevin or Glenn, you're guiding to over 10% organic growth this year. What are some of the puts and takes to consider for next year on the top line in the bottom line? Any color on currency at this time? And we've seen a lot of companies increase their tax rate beyond '23 or guide to a higher tax rate beyond '23. Anything we should be aware of with Stryker? And I had one quick follow-up.

Larry, I'll start out here and then Kevin can pile on. First of all, we're super excited about 10% to 10.5% growth for the full year 2023. And stay tuned to January, and we'll guide on 2024. As I think about currency, it was a little bit of a headwind in Q3. It's a little bit of a headwind in Q4. We don't necessarily think that it's going to get worse, but it's probably going to stay right where it is. We'll assess that for 2024 when we get to January for that guidance. And then on tax, we just continue to have some favorability on some of our discrete items and also the way our sort of global mix of taxable income is rolling up, and that has helped us tax as it relates to Pillar 2; at this point, we're not projecting really anything negative next year, if you think about our overall tax position. But of course, we'll include that in our guidance early next year. Thinking ahead, I keep talking about the super cycle of innovation. And it is really in full swing. You've seen that with the camera launch. You saw that with the amazing instruments performance in Q3 on the backs of the Neptune S launch and the power tool launch, which is really gaining momentum. And then we've got a very exciting next-generation professional defibrillator launch starting early next year. So we feel very good about our momentum really driven behind innovation and strong commercial execution.

That's helpful. I have a question about the margins. I understand you'll discuss the long-term goal of returning to pre-COVID operating margins at the analyst meeting next week, so I won't ask for specifics. However, how much visibility do you have on this, and what factors are contributing to getting back to those pre-COVID margins?

Yes. That's a good question, Larry. And we will give you more color on it next week at the analyst meeting. What I can say for now, though, is that we have pretty good visibility to our supply chain and our raw material purchases. To the extent possible, we enter fixed contracts related to the pricing of that, which certainly impacts our outlook for 2024. We're not seeing any more spot buys. They basically have gone away for Q3. And so we feel pretty positive about that. We're also feeling better about our freight as things get a little more normalized, and we're seeing less expediting of raw materials or even products. So we're in a good position there. I would tell you that all of this has a backdrop of inflation that we know we have to offset as we move forward. And as we sprint back to 2019. So we are working on that. Part of the strategy around that has really been a lot of the positive momentum that we've seen in pricing, and we will continue to work on our pricing strategies as we enter next year.

The next question comes from the line of Robbie Marcus from JPMorgan.

Great. I wanted to start on Ortho and hips and knees, and we've seen this a lot this quarter with increased seasonality. Wondering if you could speak to the trends in the quarter. Do you think you're still gaining share? And do you expect normal seasonality to return in the fourth quarter?

Yes, sure. I'll take this question. I would say we did see what I'll call the more normal seasonality after the last few years of turbulence, starting with the pandemic. And so what that means is we think Q4 is going to be strong, seasonally strong as it was going back to '17, '18, '19. We're already seeing that kind of with the month of October. So I think we're doing fine. Our business did not surprise us in terms of the results that we had. And obviously, we had giant comps from last year. If you look at the growth we had in Q3 of last year, feel very good about our position in both hips and knees and expect to have a good fourth quarter.

Great. And maybe following up, same line of thought. Other ortho had a nice quarter. Maybe you could just speak to trends in robotics and Mako and placements and just the capital equipment environment overall?

Yes. Look, the capital equipment environment overall is healthy. And you see that in Endoscopy and Instruments numbers, even medical. The full year medical is going to be double-digit growth. It will be our fourth consecutive year of double-digit growth in medical. Obviously, Q3 was a little softer than Q2, which was huge. And large capital will vary a little bit from quarter-to-quarter. But overall, the environment is healthy. You saw the OUS numbers for other ortho are very big. So Mako is really picking up in both Asia Pacific as well as EMEA. But overall, just tremendous momentum across our business on the capital side.

The next question comes from the line of Chickering with Deutsche Bank.

It's Pito. On the margins, I realized that you're not giving us margins sort of for 2024 yet. So focus on the third quarter gross margins. Can you bridge us on how you grew 220 basis points year-over-year? And how that compares to the guidance last quarter about gradual margin improvement. Are there any one-timers in there? Because you're already sort of within 100 basis points of where you were in third quarter '19.

Yes. There's a couple of pieces here. Obviously, one of the pieces is where we were a year ago as you looked at Q3 and the impacts we were feeling pretty severely from spot buys. Fast forward to where we are now, we're not seeing any spot buys. A lot of that is flushed through the income statement already. So that's some given improvement right there. We're also seeing sort of a more normalization of supply chain management. So a lot of that means we can get back to things like ocean freight and not air freighting all the time. We can have regular manufacturing scheduling and cadence which means that we don't have people cycling in and out, which is really inefficient. And so I think that combined a little bit with sort of the mix that we saw within the quarter just really helped us give a lift to the gross margin. I mean we still expect gradual improvement. And I think that's what you'll see. Keep in mind for Q4, seasonally, it's a big MS&T quarter. And so we'll feel that mix impact in Q4 in the gross margin.

Okay. And the follow-up question, like you talked about a big backlog in medical. Are you seeing hospital CapEx continue to grow as margins improve from hospitals? Or are you seeing any impact in the rising rate environment and/or additional pressure on physician compensation changing hospitals to CapEx in the near term?

Peter, it's Jason. I'll take this one. I think just to build on what Kevin said from a capital environment standpoint, it continues to be strong for us. And I think just to remind you, as you think about our capital, right, the large percentage of our capital is this revenue-generating capital that has to be replaced with procedures. And so that continues to be strong. And then, again, to Kevin's point on Medical, as you think about a double-digit year, the large capital continues to be strong. So really no change of tone for us as it relates to the capital environment.

The next question comes from the line of Joanne Wuensch from Citibank.

Number one, can you quantify the impact of the fewer selling days? And number two, you said that the shoulder and spine applications are on track. Could you remind us what on track means? And how do you see those products adopting and ramping over time?

Thank you, Joanne. We've previously mentioned that a one-day impact equates to approximately a 1% effect on the total company. This impact is more significant for implants than for capital equipment. Earlier this year, specifically in the first quarter, we benefited from an additional day, but this quarter, we lost a day. However, the total number of days for the full year remains unchanged. Regarding product timelines, we anticipate the Mako spine application to be ready around the middle of next year, and we are on track with this. We've presented it to some surgeons at NASS, and the feedback was very positive. This product will include a Mako application, which I have seen and is impressive, as well as an additional product from our insurance division for spine surgeons. This will create a robust ecosystem. The shoulder application is scheduled for an initial launch towards the end of the year. Both products are proceeding according to the timelines we previously shared.

The next question comes from the line of Vijay Kumar with Evercore ISI.

Kevin, maybe on that last question on the Mako spine and shoulder, can you compare and contrast what a Mako application for spine and shoulder, what the launch curve should look like versus hip and knees? Are there any differences between hip and knee surgeons versus the spine market and shoulder market?

I wouldn't say there's much of a difference, to be honest. In the case of Spine, we were the first, right? So Mako was first, and when you're first, the uptake tends to be a little slower. Overcoming people's objections and the need for change management can slow things down. For spine, there are already a couple of players in the market, and we have a significant presence with our robots. Therefore, I believe the ramp-up will be faster than what we observed with hips and knees. The shoulder will be different because it involves first-time applications, including bone preparation. So I suspect the uptake for shoulder will be slower, but our shoulder business is already growing strong and has been in double digits for a long time. We have an impressive pipeline with new products like the pyrocarbon product and the patient magical anode, as well as mixed reality. There are numerous new offerings in shoulder, so while we don't need to drive high growth urgently, it will still be impactful. However, due to the change management involved, the uptake will likely be slower. On the other hand, Spine has been designed with a very seamless and efficient workflow. Since it’s not the first in the market, I think Spine will see a quicker uptake.

Fantastic. And maybe, Glenn, one for you. The gross margin performance was pretty impressive in the quarter. When you look at the Q1 to Q3 sequential ramp here, is Q3 the right jump-off point because some of the elements you mentioned look like they seem to be sustainable? I think free cash conversion related to that I think you had some inventory impact. Should that go down for next year and see a more normalized conversion?

Yes. No, as I said, you're right, Q3 was a very strong performance in gross margin for a lot of those reasons that I talked about. I do think you got to look at sort of first of all, seasonality relative to our gross margin, and we talked about that for the amount of MS&T that will flow through. So I do expect Q4 will moderate just a little just because of that mix issue. And then as we get into next year, we'll talk more about that at the analyst meeting.

Great. Sorry. On free cash, would that normalize for next year?

Yes. I mean we've always targeted between 70% and 80% for free cash flow. And I don't expect that we would move away from that target.

The next question comes from the line of Shagun Singh with RBC.

Kevin, there's a lot of excitement about your super cycle of innovation and the products that you've already launched or you are yet to ramp. Could you help us better quantify the contribution in '23 and '24? Is it low hundreds of basis points in '24? I think this quarter alone, I think you beat our numbers by between 500 and 700 basis points for those segments. So it translates to about 130 basis points if you apply that to a number for '24. But just trying to do some math there. Any color would be helpful.

Yes. Shagun, thanks for the question. We really haven't been in the habit of providing breakouts of the impacts of new products. It really is why we drive at the high end of med tech, why we consistently outperform the market by roughly 300 basis points. That's the formula. Consistent cadence of new products combined with really great sales force execution through our decentralized business units. That's the Stryker model. What's interesting about this cycle is, as you point out, it's probably a little bit of a greater impact coming from organic innovation because so many really impactful products are all launching around the same time. I mean if you look at electronic extremities business, that double-digit growth performance is pretty impressive. And we don't really talk about trauma extremities nearly enough. And then we have this Pangea system, which we showed at the OTA conference recently, just in the last two weeks, and the feedback was incredibly positive. Now that won't impact our business until the second quarter of next year, but we are ramping up for the launch. Feedback from surgeons was amazing. It's the biggest launch they've ever had, which is going to fuel even more growth on top of an already high-performing business. So I think the way to think about it is just we can count on Stryker to outperform the market very consistently because of these new products and breaking out how much of that versus how much is price on new products and mix. And we're not going to get into parsing those elements. But rest assured that, that is the engine of growth for our company.

Got it. That's helpful. And just as a quick follow-up. Can you just remind us how you define Stryker's performance at the high end of med tech? So how do you define that growth range?

Yes. Historically, we've said 200 to 300 basis points higher than the market, Shagun. I would say, right now, it's tracking more towards 300 basis points faster. The market has improved clearly versus where it was a few years ago, but we continue to outperform it at that kind of level.

The next question comes from the line of Ryan Zimmerman with BTIG.

I want to dovetail on Shagun's question and also Larry's earlier question on '24 and asking the way, I appreciate you guys have always been at the higher end of med tech. But Kevin, when you think about some of the puts and takes that you've outlined, be it robust orthopedic demand, offset by some of the staffing issues that we're seeing in hospitals. Do you anticipate '24 to be at a growth rate similar to kind of what we think of as historical net debt growth rates in that 4% to 5% range?

Ryan, it's Jason. I'll just jump in here and then we'll open it up for your follow-up. But as we think about 2024, obviously, we will get into that more in January. I can give you a little bit more detail. But at this point, we won't comment any further in terms of how we're thinking about the top line.

I had to approach this from a different angle, so thank you for your understanding. I'll change topics now. Your head of the knee business recently gave an interview that I found quite interesting. You mentioned that there are around 300 Mako robots currently in ambulatory surgical centers. I'm curious about your perspective on how high that market could reach, especially considering the socket aspect. With 12,000 ASCs in the U.S., it seems unlikely that all would have a robot, though it’s a nice thought. As we've observed Mako's growth, it initially attracted about 2,000 hospitals, and then potentially all 5,000 hospitals in the U.S. It's early in the ASC space, but where do you envision this heading over time?

Yes. Listen, Mako is performing extremely well in the ASC. And just as a reminder, right now, at our hip and knees procedures roughly, call it, 12% of those are being done in ASCs. That number is growing dramatically and will continue to grow dramatically. And as surgeons move their business to the ASC, they do not want to suffer. They want the best technology, they want Mako. So I see tremendous upside in Makos in the ASC because they want to be able to do it; it lends itself very well. There's fewer instruments which means less pressure on sterilization, which is a major bottleneck within ASCs. They don't have the same room for sterilization that hospitals do. So it's actually a very, very effective product to have in the ASC. And so as that percentage of 12% moves and based on different pundits, it's somewhere between 30% and 40%. As that goes higher, you're going to see more and more robots being installed in these ASCs. So there is a significant upside in front of us here in the United States. And frankly, ASCs, now they're starting to talk about it in multiple countries in Europe. In Switzerland, they're talking about it in Germany, they're talking about, and in the U.K., they're starting to figure out that this model is actually a good model for the delivery of healthcare. Good for surgeons, good for staff. Staff, frankly, nurses love going to ASCs. We're having less issues on staffing and surgery centers than we are in hospitals and good for the patients. Patients actually like going to a place where there aren't sick people and where there's easy parking and where you can go home the same day.

The next question comes from the line of Matthew O'Brien with Piper Sandler.

Kevin, that Mako line this quarter was pretty eye-popping. So I'm kind of wondering, J&J launched the system at WS this year. I'm not sure it's all that great. But Zimmer was pushing as well. Did you see a pause in the market with some of those dynamics? And then that's kind of behind you now and you're winning a disproportionate share of Mako sales placements? And then specifically within there, are you getting more of those placements into competitive accounts that you have historically? Or is it still kind of a reasonable mix between existing Stryker accounts and then competitive?

Yes. We're not seeing much change in the mix between competitive accounts and those that prefer Stryker. It remains quite similar to what we've experienced during the launch. Ultimately, customers want technology and are looking for the best options available. When the competitive products entered the market, there was a slight slowdown as buyers compared different companies’ offerings, but it was relatively modest. Right now, we're not worried about these comparisons. In fact, we encourage customers to evaluate products side by side. We genuinely believe we offer the best solution for hip and knee replacements within the same robot. We also look forward to incorporating additional applications, such as spine and shoulder, into the same robot in the near future.

It makes sense. And then Kevin, again, you touched on this at the beginning, but GLP is a dominated a conversation for all of us on this call. There's some Shanghai data out there about a big reduction in knee replacements in that study, although I'm not sure that study is all that robust. There's another OA study coming out fairly soon that we're all looking at. I'm just curious what Stryker looked at internally that gives you that comfort that you can tell investors confidently that this is not going to be an issue, not necessarily now, but in 2, 3, 5 years from now, and then I don't know if you can talk a little bit about some of these near-term benefits that you're seeing in terms of some patients that have lost weight that are now eligible to get a knee or hip replacement.

Yes. Thanks. Look, I'm not going to use today's call for this because we have an Analyst Day next week and Investor Day, and we're going to have a surgeon there, and we'll actually devote some time to the GLP discussion. What I would tell you is the study is saying that there's going to be a reduction, I think, our nonsense. And here at the August meeting in Dallas right now, spent the morning talking to multiple surgeons at massively credible teaching hospitals, world renowned teaching hospitals who have poured through the research and feel that there is no need for us to worry whatsoever about any slowdown in our knee procedures.

The next question comes from the line of Josh Jennings with TD Cowen.

This is Eric on for Josh. Looking at spine, there's been some consolidation in the last few quarters. And I was just wondering if you could share a little more detail on your observations in that market. Do you think you're benefiting from any share shifts? Are you making any competitive rev hires? Any detail there would be great.

Yes, it's still early to discuss the significant consolidation happening, and it's not the only instance; we've observed considerable consolidation over the past four to five years. There are still more operators in the spine sector compared to some of our other specialties. I believe a key driver of this consolidation is enabling technologies. Having strong enabling technologies is essential for long-term success. We are pleased with our Q guidance system, which features the fastest camera in the market, developed internally at Stryker. This QCard will eventually integrate with Mako, offering an even smaller footprint than other spine enabling technology ecosystems. I view this as a catalyst for the future, likely leading to even more consolidation ahead. Regarding the sales force, it's too early to see significant changes. More adjustments will likely occur as we move into next year when decisions about territory assignments and personnel will be made. For now, everything is being kept constant, but that disruption will happen, and we are eager to capitalize on it in any way we can.

The next question comes from the line of Travis Steed with Bank of America.

Just a quick follow-up on the M&A question. Just curious if you'd put a little bit of framework around some of the size of deals you're willing to do or what we should kind of expect when you move into some of the larger deals you've commented on in '24.

Yes. Look, M&A is very fluid. We're not going to really comment on size of deals. Over time, obviously, the larger volume of our deals are going to be smaller tuck-ins, but our debt-to-equity ratio is getting right around close to that 2.5 level. That's a nice level to be at. And once we hit that level, then we have the freedom to be able to do what I call main course size deals. I think we've been on an appetizer diet towards the end of last year and into this year. And we have the capacity to be able to do $1 billion deals if they present themselves and if the returns are strong. So not going to predict exactly what will happen, but we're going to get back to kind of our normal offense in M&A that you saw for the last 10 years prior to the big spending on right Medical in Vocera.

Great. That's helpful. And then I know you're not going to give the answer, but just curious if you kind of level set what we should expect at the Analyst Day. Are you going to give some sort of revenue and margin long-range plan? It sounds like '24 guidance won't be until January. Just curious if we kind of level set what we should expect there.

Yes, Trav, this is Jason. I have a couple of comments to share. First, regarding your question about 2024, we'll provide more details in January. As we prepare for Investor Day next week, it will outline our long-range plan. We’ve discussed our intention to return to 2019 margins, and you'll hear more about that along with our growth plans for the next three years. However, we will focus on 2024 in January.

The last question comes from the line of Richard Newitter from Truth Bank.

A couple of weeks ago, I wanted to ask about the Spine robot. It seems like you are still quite positive about the launch timing, which I believe is set for the middle of next year. Please correct me if I'm mistaken. Medtronic has already modified the Mazor system to include bone-cutting features. I would like to know what capabilities we can expect from your initial launch in terms of indications. Are you aiming to compete with second, third, or fourth generation systems, or will you be starting with more basic capabilities like pedicle screws and then progressing from there?

We're aiming for the third quarter to launch the spine robot with Mako. The Mako spine launch will focus on pedicle screw placement and features a workflow that is faster and smoother than current market options. I'm very satisfied with the performance of our Mako Spine robot. Additionally, we're introducing another product that will be released within the same ecosystem, utilizing the same navigation card, which will allow for bone cutting. Although it’s a distinct product from Mako, it will operate seamlessly within the same ecosystem. I believe that with these two launches, we will transition from being behind the competition to leading the market. Both products will be launched simultaneously, enhancing our ecosystem significantly.

Okay. And then just on augmented reality, can we assume that the application you have in shoulder, I think, for right now, that's going to go to other orthopedic areas? Do you have any time lines for that? Or is that something we'll hear more about next week?

Look, I'm not sure we're going to tell you a lot more about it next week, but we're big believers in well, the term we use is mistreality so that we can actually sort of see through the rest of the room and also see the screens. We're big believers in mixed reality. It's going to be a big part of the future. So you don't have to look sideways when you're doing procedures; you look right into the surgical field. But I'm not sure we're ready to give you time lines on that. But that's something we believe is going to be powerful. We're already seeing some of the value with shoulder, and we have every intention of expanding that to other applications in the years ahead.

The next question comes from the line of Drew Ranieri with Morgan Stanley.

Kevin, for you, you were talking about your strong U.S. and OUS knees replacement growth. But you're also talking about change management when it comes to maybe the spine or the shoulder application. When you do think about OUS geographies for Mako, can you just talk about the utilization that you do see for hips and knees because there's a bit of a change management there. Robotics is fairly new OUS. But are you seeing any type of acceleration compared to what you saw in the early days of U.S. launch?

Yes, currently in the Asia Pacific region and outside the U.K. in the rest of EMEA, we are at a similar stage as we were five or six years ago in the United States. We are experiencing a turning point, with significant progress in markets like Japan and India, as well as some other European countries. Although Australia has already adopted our solutions rapidly, we are beginning to see strong growth in these additional markets. This mirrors the impressive growth we saw in the U.S. five to six years ago, and it is genuinely exciting. You can observe this momentum in our orthopedics numbers as well, particularly in the hip and knee segments internationally. I believe this growth will continue steadily over the next few years, as we have taken time to establish our presence in these markets, but we are now gaining momentum and feeling optimistic about Mako's future. This discussion is primarily about hips and knees, without even considering spine and shoulder applications, which have required more time to familiarize surgeons with the model, provide MPS training, and manage language translations. We have navigated these challenges, and now we are beginning to see substantial growth, which I expect to persist in the coming years.

Maybe I'll save this one for next week, but just on GLP-1, just talking to a couple of ortho surgeons ourselves. I got the sense that they actually do heavier BMI patients still manually versus robotics. If you do actually see a near-term benefit as these patients do lose weight, would you expect to see more of a mix benefit on Mako or just kind of a rising tide lifts all ships for your knee business?

Yes. To me, it's a rising tide lifts all ships. And whether they do manually or doing it robotically, that's really a surgeon choice. It's not really tied to how thin or how heavy somebody is, whether they choose to do it manually or robotically.

The next question comes from the line of Danielle Antalffy with UBS.

Thank you so much. And I actually had a question, I'm sure you guys will talk about this more next week, so sorry if I'm front-running that. But international looks pretty strong this quarter. Just curious about what you can say, what's driving that growth and how sustainable is that? And then the second part of the question is on the orthopedic backlog and whether the magnitude of the backlog this quarter versus last and the quarter prior has come down. Appreciate you believe it's going to continue to contribute into 2024. But I guess I'm just trying to get a sense of the magnitude of that contribution going forward, how we should think about that.

I’m very excited about our international growth. We’ve seen five consecutive years of international sales outpacing those in the U.S., and this year is set to make it six. Mako is just beginning to pick up momentum in many international markets, and our camera business is also gaining traction. We are well-prepared, and next week, we will hold an international panel with several of our leaders from those markets available to engage with investors and analysts. We are optimistic about our international prospects, which haven’t always been this positive—10 years ago, it was a challenge for us. There is still substantial growth potential, especially since over 70% of our sales are still within the United States, indicating that we have significant opportunities in international markets that should continue for the foreseeable future. Now, onto your second question, Jason.

Yes, I'll take the second part here, Danielle. So as it relates to kind of procedural backlog, and similar to what I said in my prepared remarks, procedures are strong, right? And so as we think about kind of Q4 and into next year, I'm not going to try to quantify in terms of percentages of growth that comes with that. But we do think that we'll remain elevated kind of well into next year. And every quarter, we reassess that based on intelligence that we have, talking to surgeons, et cetera. But we do expect it will continue to be a moderate tailwind into next year.

The last question comes from the line of Matt Taylor with Jefferies.

This is Yang Li in for Matt. I guess to start, I was wondering price was positive this quarter, continuing the trend from early in the year. I guess I'm just wondering how sustainable do you think the positive price momentum can be going forward?

Sure. You're right. Q3 continued our favorable pricing trend with sort of 0.3% coming off of Q2, that was 0.5%. And a couple of comments I would say. As we look at the full year, we think that it will be positive for the full year. And we also have put in place kind of the incentive process as well as the contracting process to really make sure that we're considering price as we think about working with our customers on buying products. So I feel good that we have the sort of mechanism that is going to continue to look at price. That being said, you're absolutely right. We'll anniversary on product over product year-over-year, which may make things a little bit tougher. One thing that I would keep in mind though, that Kevin talks about this product super cycle and a lot of next-gen products coming out. So if you think about our pricing calculation of statistic, it really doesn't include the impact of price increases that we get on those products because of the technologies that they're bringing to market. So I think that is actually an element of pricing that's going to help us as we think about next year. And I don't think it's something going to walk away from as long as inflation is having an impact, we'll continue to have those discussions with our customers about pricing.

All right. Great. And then, I guess, for the follow-up, I wanted to hear a little bit more on potentially hiring more robotic or capital reps ahead of the shoulder and in robotic launches. I wanted to maybe get a better sense of how you'd be entering the market. Is it more of a hybrid sales process with the clinical reps? I mean I would assume you would focus initially on the existing customers, but maybe how long before you start going on offense and try to convert surgeons with Mako?

We have a dedicated sales force that we utilize. Even before considering spine or shoulder products, we already have specialized salespeople for joint replacements and power tools. We believe in having dedicated capital representatives who will market directly to both competitive and new surgeons from the start. Our strategy at Stryker does not involve just pursuing friendly relations; we focus on customers who are interested in our technology, regardless of whether they are existing or competitive clients. We prefer not to mix implant representatives with capital sales, as it doesn't align with our approach. We are confident that having specialized personnel will enable us to achieve solutions more efficiently as we expand the applications for Mako.

Thank you. There are no further questions in the queue. I will now turn the call over to Kevin Lobo for closing remarks.

Thank you for joining our call. We look forward to sharing our Investor Day with you on November 8 and our fourth quarter and full year results with you in January 2024. Thank you.

This call has concluded. You may disconnect at any time.