Earnings Call Transcript
STRYKER CORP (SYK)
Earnings Call Transcript - SYK Q4 2021
Operator, Operator
Welcome to the Fourth Quarter 2021 Stryker Earnings Call. My name is Emily and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Following the conference, we will conduct a question-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, CEO
Welcome to Stryker's fourth quarter earnings call. Joining me today are Glenn Boehnlein, Stryker's CFO; and Preston Wells, Vice President of Investor Relations. For today's call, I will provide opening comments, followed by Preston with an update on the trends we saw during the quarter and our annual Mako update. Glenn will then provide additional details regarding our quarterly results before opening the call to Q&A. As a reminder, as announced during our Analyst Day in November, we have reclassified our reporting segments into two groups: MedSurg and Neurotechnology and Orthopaedics and Spine. This better aligns to how our businesses are managed internally. We have also pulled out Neurovascular on its own line and have the business units of neurosurgical instruments, CMF and ENT now grouped under Neurocranial. As we have done all year, we will comment on our performance versus 2019, which we believe is a better basis for comparison. For the quarter, organic sales growth exceeded 6% compared to 2019, driven by double-digit growth from our MedSurg and Neurotechnology businesses but offset by softer sales of our Hips, Knees and Spine as COVID and hospital staffing challenges had a meaningful impact on elective procedures during the quarter. We posted double-digit organic growth in international compared to 2019 as our globalization efforts continue to bear fruit and where COVID impacts were generally less severe than in the U.S. While our more deferrable businesses were challenged, we saw excellent results from our Mako robotic technology, capital products across our metric portfolio and continued double-digit organic growth in Neurovascular, which reached approximately $1.2 billion in sales for the year. Despite the unanticipated Omicron variant, we were able to achieve full-year sales growth and adjusted EPS within our latest guidance ranges. Our full-year organic growth exceeded 7% and reflects strong demand for our Mako and MedSurg capital equipment and strong double-digit sales growth within Neurovascular and Neurocranial. In addition, we are very pleased with the Wright Medical integration, particularly in the U.S. Our full-year adjusted EPS grew 10% compared to 2019 and we delivered free cash flow conversion of 85%. The EPS growth was a strong result given the inflationary pressures that grew in the quarter and the COVID impact on our implant procedures. We continued to invest in R&D at a healthy rate of 6.6% of sales for the year and our new product pipelines are poised for continued success. Our strong cash flow performance provided us with additional flexibility to execute on M&A opportunities in the quarter, including Thermedx, a small tuck-in within endoscopy and the recently announced agreement to acquire Vocera. Despite the impacts of the pandemic throughout the year, we were able to surpass $15 billion, $16 billion and $17 billion in revenue for the first time. And we remain confident in the outlook for our business as the pandemic recedes. We continue to execute on our key growth strategies, including the expansion of our ASC offense, continued product innovation and category leadership across our businesses. Turning to 2022; the volatility caused by COVID variants remains ongoing and is further impacted by hospital staffing challenges and supply chain disruptions. In spite of this, we expect to continue to deliver above-market sales growth. However, given the pressures on our supply chain within MedSurg, we do not expect to deliver our typical degree of earnings leverage. We continue to be disciplined with our spending. However, we will continue to fuel new products with healthy R&D spending and will maintain our focus on above-market growth while we work through these cost pressures. As noted in the press release, we are guiding to 6% to 8% full-year organic sales growth and adjusted EPS of $9.60 to $10 per share. As I conclude my comments, I remain confident in our strategy, talent and culture. I would like to thank our teams for continuing to persevere in these challenging times. I will now turn the call over to Preston.
Preston Wells, VP of Investor Relations
Thanks, Kevin. My comments today will focus on providing an update on the current environment, including the latest impacts of COVID-19 across certain products during the quarter. In addition, I will provide an update on Mako and recent acquisitions, including the continued integration of Wright Medical and the performance of our combined Trauma and Extremities business. During the quarter, hospital bed and operating room capacities were challenged because of the Delta variant early in the quarter and most recently by the Omicron variant, which started to pressure elective procedural volumes in December. In addition, ongoing nursing staffing shortages disrupted hospital scheduling of procedural volumes. The delay in procedural volumes primarily impacted our implant-related businesses, including hips, knees, spine and foot and ankle, which can be deferred for a period. However, we know that most of these patients will eventually return to have those procedures completed as the impacts from COVID decline and procedural volumes return to more normal levels. Demand for our capital products was strong in the quarter, including double-digit orders and sales which created a strong order book for capital products. Despite the strong capital demand, there were some headwinds in the quarter that primarily impacted our Medical business, including installation delays caused by hospital staffing challenges and raw material shortages primarily related to electronics that created some supply disruptions. For the full year 2021 versus 2020, our global Mako installed base grew by 27% and we now have an installed base that is approaching 1,500 Mako robots. This growth continues to highlight the high demand for our differentiated Mako robotic technology. This strong double-digit growth also underscores our ongoing success installing robots in major teaching institutions, ASCs and competitive accounts, as well as our focus on expanding into international markets. In the fourth quarter, we saw a meaningful increase in the percentage of robots installed into competitive accounts. Turning to U.S. knee procedures. In the fourth quarter, over 50% of our total knees were Mako knee procedures, a trend that continues to increase and demonstrates the outstanding utilization of the Mako install base. The shift towards cementless knees also continued. In the fourth quarter, cementless knees made up 47% of our U.S. knee procedures. Additionally, in the fourth quarter, over 25% of our total hip procedures were Mako Hip procedures, which, similar to knees, continues to increase in utilization. Our recently launched Insignia Hip Stem will also be Mako-capable by the end of the first quarter. We expect to further our leadership position in orthopedic robotic-assisted surgery through the continued adoption of our Mako SmartRobotics platform on a global basis. Shifting to our Trauma and Extremities business. We are now over one year into the integration of Wright Medical which continues to progress well in all regions and across all functions, despite the headwinds from COVID. Including Wright Medical, the combined U.S. Trauma and Extremities business grew high single digits in 2021, which exceeded our expectations. The full year growth in the United States was driven by strong growth in core trauma and double-digit growth in the upper extremities business, which offset the COVID-related impact on foot and ankle. This strong result reflects excellent execution of the sales integration and the strength of the product portfolio. Finally, our dedicated divisional business development teams continued to identify and execute on meaningful acquisitions. As Kevin mentioned, we recently announced our agreement to acquire Vocera and enter the fast-growing digital care coordination and communications segment. We expect the Vocera acquisition to close by the end of the first quarter. During the fourth quarter, we also finalized the acquisition of Thermedx. Thermedx is an innovative developer and manufacturer of fluid management solutions and will allow our endoscopy business to improve surgical visualization across the women's health segment and advance the standard of care in the urology segment. We believe these and other acquisitions completed during the year will help us continue to drive above-market growth in the future. The overall environment remains uncertain as a result of the continuing COVID pandemic and we expect hospital staffing shortages, supply constraints and significant inflationary pressures caused by raw material shortages to persist throughout 2022. However, we believe that the underlying demand for our products remains strong and coupled with a robust order book for our capital products, gives us confidence in our ability to drive market-leading growth when the impacts of the pandemic subside. With that, I'll now turn the call over to Glenn.
Glenn Boehnlein, CFO
Thanks, Preston. Today, I will focus my comments on our fourth quarter financial results and the related drivers. Today's sales comments will be provided based on our new reporting structure. And as with previous quarters this year, all comments are in comparison to 2019, as it is a more normal baseline given the variability throughout 2020. Our detailed financial results have been provided in today's press release. Our organic sales growth was 6.2% in the quarter. The fourth quarter included the same number of average selling days as Q4 2019 and Q4 2020. Compared to 2019, the two-year impact from pricing in the quarter was unfavorable 1.7%. Versus Q4 2020, pricing was 0.8% unfavorable. Foreign currency had a favorable 0.5% impact on sales. For the quarter, U.S. organic sales increased by 4.7%, reflecting the impact of COVID on elective procedures, hospital staffing shortages and disruptions of general hospital operations. This was offset partially by strong demand for Mako and our MedSurg and Neurotechnology products. International organic sales showed strong growth of 10.6%, impacted by positive sales momentum in Europe, Canada and emerging markets. For the year, organic sales growth was 7.2%, with U.S. organic growth of 5.2% and international organic growth of 12.9%. 2021 had the same number of selling days as 2019 and one less selling day compared to 2020. Compared to 2019, the two-year price impact had an unfavorable 1.5% impact on sales. Versus full year 2020, pricing was 0.8% unfavorable. Our adjusted quarterly EPS of $2.71 increased by 8.8% from 2019, reflecting sales growth and a lower quarterly effective tax rate, partially offset by the impact of business mix, increased adverse COVID-related pressure on sales, gross margin inflationary pressures and higher interest charges resulting from the Wright Medical acquisition. Our full year EPS of $9.09, which represents growth of 10% from full year 2019, reflects the favorable impacts of sales growth, operating expense discipline, Wright Medical, foreign currency and a lower effective tax rate, partially offset by increased investments in R&D as well as higher interest charges resulting from the Wright acquisition. Now, I will provide some highlights around our segment performance. In the quarter, MedSurg and NeuroTech had constant currency sales growth of 11.8%, with organic sales growth of 11.6%, which included 9.3% of U.S. organic growth. Instruments had U.S. organic sales growth of 10.6%, led by strong growth in their Orthopaedics instruments and Surgical Technologies businesses, highlighted by growth in their power tools, waste management, smoke evacuation and Steri-Shield products. Endoscopy had U.S. organic sales growth of 11%, reflecting strong performances across their portfolio, including general surgery and fluorescence products and strong double-digit growth of their sports medicine and communications businesses. The Medical division had U.S. organic sales growth of 10.3%, reflecting solid performances in their Sage and bed businesses. During the quarter, we also saw significant growth in orders across the medical portfolio, driven by very strong demand. Assuming normalization of the customer environment and a reduction of certain supply constraints, we expect these orders to contribute to another strong year for Medical in 2022. Our U.S. Neurovascular business posted organic growth of 7.4% reflecting solid growth in their hemorrhagic and aspiration products. The U.S. Neurocranial business posted organic sales growth of 5.7%, which included solid growth in our MAC space, ENT navigation and cryotherapy products, somewhat offset by continued COVID impacts. Internationally, MedSurg and NeuroTech had organic sales growth of 18.6%, reflecting double-digit growth in the Endoscopy, Medical, Neurovascular and Neurocranial businesses. Geographically, this included strong performances in Europe, Canada, China and in the NeuroTech businesses in emerging markets. Orthopaedics and Spine had constant currency sales growth of 15.2% and an organic sales decline of 0.8% with an organic decline of 2% in the U.S. This reflects the impact of the slowdown in elective procedures during the quarter as a result of the Delta and Omicron variants of COVID. Our U.S. Knee business grew 0.1% organically. As a reminder, during the fourth quarter of 2019, our U.S. Knee business had very strong growth of approximately 10.5%. Our U.S. Trauma and Extremities business grew 6.7% on a comparable basis with strong growth in our plating products combined with double-digit growth in our upper extremities business. Spine declined 6.6% organically in the U.S., primarily resulting from COVID disruptions to their business. Other Orthopaedics grew 21.5% organically in the U.S., primarily reflecting continued strong demand for our Mako robotic platform, which had growth in the U.S. of 43.5%. Internationally, Orthopaedics and Spine grew 1.9% organically, which reflects the strong momentum of Mako in Japan, Korea and emerging markets, somewhat offset by the impact of volume-based pricing in China, primarily related to our Trauson business. For the quarter, our Trauma and Extremities business, which includes Wright Medical, delivered 4.1% constant currency growth on a comparable basis. The Wright Medical acquisition anniversaried in November 2021 and will be part of our organic sales throughout 2022. Now, I will focus on operating highlights in the fourth quarter. Our adjusted gross margin was 65.8%, was unfavorable approximately 50 basis points from the fourth quarter of 2019. Compared to the fourth quarter in 2019, gross margin was adversely impacted by business mix; operational inefficiencies due to COVID, including employee absenteeism; and raw material inflation, primarily related to electronic components, steel and transportation costs. We expect these adverse impacts to continue throughout 2022 with a more pronounced impact in the first half of 2022. Adjusted R&D spending was 6.4% of sales, which represents an 80 basis points increase versus the fourth quarter of 2019 and reflects our continued commitment to innovation funding and the related growth that we'll provide. Our adjusted SG&A was 32.1% of sales, which was a 20 basis point improvement as compared to the fourth quarter of 2019. This reflects continued cost discipline and fixed cost leverage, offset by the ramping of certain expenses and hiring to support future growth and the dilutive impact of the Wright Medical acquisition. In summary, for the quarter, our adjusted operating margin was 27.3% of sales, which is 100 basis points unfavorable to the fourth quarter of 2019. This performance primarily resulted from adverse business mix, gross margin challenges, investments in R&D and the dilutive impact of acquisitions, primarily Wright Medical. Other income and expense increased as compared to fourth quarter in 2019, primarily resulting from the interest expense increases related to our debt outstanding for the funding of the Wright Medical acquisition. Our fourth quarter had an adjusted effective tax rate of 15.2%. Our full-year adjusted effective tax rate is 14.9%, which was partially impacted favorably by one-time items during the year. For 2022, we expect our full-year effective tax rate to be in the range of 15% to 16%. Focusing on the balance sheet, we ended the fourth quarter with $3 billion of cash and marketable securities and total debt of $12.5 billion. For the year, we paid down $1.2 billion of debt. Turning to cash flow; our full-year cash from operations was approximately $3.3 billion. This strong performance reflects the results of net earnings and continued focus on working capital management. For 2022, we anticipate that capital spending will be approximately $650 million. Again, in 2022, we do not plan to do any share buybacks given our anticipated focus on further debt reduction. And now I will provide you 2022 full-year guidance. As we assess the current operating environment, we believe that there will be continued volatility caused by ongoing COVID-related impacts, hospital staffing challenges and increasing supply chain disruptions as well as significant inflationary risks. Given this variability, we expect organic sales growth to be in the range of 6% to 8% for the full year 2022 when compared to 2021. There are the same number of selling days in 2022 compared to 2021. Consistent with the pricing environment we experienced in previous years, we would expect continued unfavorable price reductions of approximately 1%. If foreign exchange rates hold near current levels, we anticipate sales and EPS will be modestly unfavorably impacted as compared to 2021 and this is included in our guidance. Despite the top line and operational risks of COVID, we have good momentum in many parts of our business heading into 2022, including the continued demand for our Mako technology, a very robust order book for our capital products, continued execution of our combined T&E business and many product innovations. For the full year 2022, we do not expect to deliver our typical operating margin expansion as a result of the ongoing price escalation on supply-constrained raw materials like electronic components and rising inflationary costs on raw materials transportation and labor costs. As a result of the latest COVID wave and the current inflationary environment, we expect gross margin performance to be negatively impacted by 50 to 100 basis points with a more pronounced impact in the first half of the year. As we said during our analyst call in November, we plan to return to our normal delivery of margin expansion once we reach a post-COVID environment. Finally, for 2022, we expect adjusted net earnings per diluted share to be in the range of $9.60 to $10 for the full year. This wider guidance range represents the ongoing variability in the operating environment. The upper end of our guidance range assumes the latest COVID wave subsides in Q1, with no additional major COVID disruptions during the year. In addition, it assumes that the supply chain stabilizes by the end of the first half of the year. The low end of the guidance range assumes the continued COVID-related volatility persists, including supply chain pressures that could impact revenues as well as costs and includes more transient spot buying and longer-term supply chain pressures. We will continue to evaluate the changing environment and we'll provide updates to our guidance as necessary. And now I will open up the call for Q&A.
Operator, Operator
Our first question today comes from Robbie Marcus from JPMorgan. Robbie, you may proceed.
Robbie Marcus, Analyst
Thank you for the opportunity to ask a question. I would like to follow up on your guidance. Can you provide insight into the expected performance throughout the year? Specifically, how do you anticipate the first quarter or first half will compare to the second half in terms of revenue and profitability, so we can adjust our expectations accordingly?
Glenn Boehnlein, CFO
Sure. Yes, Robbie, I think right now our thinking is that the most significant impact on our top line and gross margin will occur in the first half of the year. We expect to feel this impact strongly in the first quarter and to a lesser extent in the second quarter. After that, we believe things will begin to stabilize by the time we reach the third and fourth quarters. However, we are facing real cost pressures, particularly concerning our electronic components, which are included in many of our products, especially in the MedSurg segment. The purchasing of these components often takes place in a spot market setting, where the pricing tends to be significantly higher than what we normally pay.
Robbie Marcus, Analyst
Got it. Maybe I could just tag on to that. As we think about first quarter here, we've heard other companies more muted kind of flattish or low single-digit growth with the cadence improving over the back part of the year. Is that a reasonable assumption? And then I'll jump back in queue.
Preston Wells, VP of Investor Relations
Yes. I mean, Robbie, we're not obviously guiding for the quarter. But certainly, as we think about the fourth quarter and how the fourth quarter ended with regards to the COVID variants continuing into January. So I think you can certainly think about it that way that there are some of those pressures from a top line standpoint that are certainly continuing at the beginning of the year.
Operator, Operator
Our next question comes from the line of Joanne Wuensch from Citi. Joanne, your line is open.
Joanne Wuensch, Analyst
Thank you and good evening. Two questions; the first one has to do with U.S. Mako robotic placements. If I heard that correctly, that's a big number. Should we interpret that as just general demand or maybe demand ahead of expectations for increasing procedures?
Preston Wells, VP of Investor Relations
No. I think, Joanne, if the Mako numbers you're referring to are how we're continuing to utilize Mako as it becomes a bigger and bigger portion of our total knee business, I mean this is just a continuation as we think about what we've talked about over the last few years. So again, we expect this to just continue to grow as we think about the utilization both on knees and what we're now seeing on hips as well and then also as we think about cementless in the knee world. So we would expect that just to continue to go as we continue to place and install Mako's in different areas.
Joanne Wuensch, Analyst
All right. And then it sounds also, if I'm hearing correctly, that this may be a year where you just sort of plow through and continue to invest, even if it's a little bit rocky. Is that the right way to think about things?
Kevin Lobo, CEO
Yes, Joanne, this is Kevin. That's exactly the right way to think about it. We have terrific product pipelines. We have a lot of new products we're launching this year, including a new power cot, the Insignia Hip Stem, a number of foot and ankle launches, three launches in the upper extremities space. We have the in-space balloon. So a lot of new products but we're also gearing up for 2023, where we're planning to have a next-gen camera, a next-generation power tool, next-generation life pack. And as you know, these new products are really the lifeblood of our top line growth. So we are not going to slow down on the R&D investments. Of course, we'll look at the rest of our SG&A and be cautious just like you've seen us be cautious over the last two years. But yes, we are going to power through. But we do have a lot of tailwinds. We have a very strong order book and capital equipment. We're having a little trouble securing all the components to be able to ship all the products but we have a healthy order book. We have good momentum. And obviously, we need to ride out the COVID challenges. But yes, we are going to continue to invest for the future.
Joanne Wuensch, Analyst
Thank you. Have a great night.
Operator, Operator
Our next question comes from Lawrence Biegelsen from Wells Fargo. Your line is open.
Lawrence Biegelsen, Analyst
Thanks for taking the question. One for Glenn on margins and one on Hips and Knees. So on margins, Glenn, just to clarify the negative 50 to 100 basis points of gross margin impact. Is that the gross impact from inflation hitting the P&L? Or is that the impact you expect on the year-over-year change in the gross margin in '22 versus '21? And why are you confident the inflation will abate in the second half of the year and it won't linger? And I have one follow-up.
Glenn Boehnlein, CFO
Yes. Larry, honestly, that's the year-over-year impact to gross margins, not the isolated necessarily inflationary impact. That would include impacts from pricing pressures as well. Confidence that it will abate, I don't necessarily think that I have confidence it will abate. I think it will moderate is what will happen. I mean a lot of this pricing pressure is based on commodity pricing which is highly driven by supply and demand. I do believe that supply will catch up. We are securing bulk purchases of demand. So I think that will help us even out our utilization of it as well. And so I do think by the back half of the year, we'll start to see moderation of those costs.
Lawrence Biegelsen, Analyst
That's helpful. Kevin, typically, knees are considered more deferrable than hips. However, this time, your growth in knee procedures was significantly better than your growth in hip procedures. This seems unusual, as we usually think of hips as being less deferrable. What factors do you think contributed to the stronger growth in knee procedures compared to hip procedures this quarter? Thanks.
Kevin Lobo, CEO
Knees has been the main driver of growth in our joint replacement business over the last couple of years. The combination of Mako and cementless technology has led to significant growth in Knees compared to the market. In Hips, we currently have a gap with the new hip stem that we are just starting to launch. The full launch will occur at the Academy event and later this quarter, which will help address the gap in the direct anterior procedure. I anticipate that our Hip business will improve. While it’s true that Hips are generally less deferrable, the current product mix has favored Knees. This trend has been ongoing for several years, and we expect our Knee business to continue to perform well. We are also excited about the new hip stem, especially as it becomes compatible with Mako at the end of this quarter.
Operator, Operator
Our next question comes from Matt Miksic from Credit Suisse. Matt, your line is open.
Matt Miksic, Analyst
Hi, good evening. Thank you for taking our questions. I have a question for Glenn about margin trends and earnings growth for this year and beyond, and then a follow-up for Kevin regarding ASCs. Glenn, this year, you've mentioned in your prepared remarks the inflationary pressures you are hoping to manage better by the end of the year. Considering your longer-term outlook shared during the Analyst Day, could you discuss reconciling this near-term outlook and expectations for earnings growth in the current environment with the longer-term average EPS growth you described, which anticipates a different environment for next year and beyond? I also have a follow-up for Kevin regarding ASCs.
Glenn Boehnlein, CFO
Okay. Yes, Matt, I think, first of all, at the Analyst Day, the guidance that we laid out was our long-term financial guidance. That guidance was specifically once we exit this kind of COVID environment, which clearly in 2022, we are not in a position that we're exiting the COVID environment. Right now, just based on foundationally what is underlying those long-term financial plans in terms of what we have lined up for growth, how do we think about M&A, how do we think about our product portfolio and new innovation, I see no reason why we would change our thoughts around that long-term growth. Now if you work your way down through the income statement and say, okay, how are you going to finagle your EPS to get to that growth challenge number. I actually think in this year's growth number, if you look at the high end of our EPS, we're not far away from what we're asserting is our long-term challenge. I do think that once COVID abates, we will get right back on our cost improvement initiatives, especially around direct purchasing. I don't see that changing at all. Throughout COVID, we have kept up pace in our CTG initiative still, just in terms of focusing on shared service opportunities, looking at indirect purchasing opportunities. And so all those foundational elements are still in place. And I do have all the confidence to think that once we exit COVID that we'll get right back into that cadence of delivering that.
Matt Miksic, Analyst
That's helpful. Regarding ASCs, which were a key focus in your Analyst Meeting and mentioned again in your Q4 performance commentary, could you share your thoughts on the Orthopaedics and large joints segment as it moves into that channel? People have been discussing this for some time, and it would be great to understand your perspective on the percentage of your business in that area, the growth differences compared to your traditional larger centers, and any additional insights regarding Q4 that you could provide.
Preston Wells, VP of Investor Relations
Matt, it's Preston. So as we've talked about in the past, we talked about our Knees, in particular, being about 5% to 10% of our business being in the ASC. And as we've seen that continue to grow, as we came through the fourth quarter, we're seeing numbers that are actually reaching closer to that 10% number. So, we are seeing that shift happen. I mean it certainly is happening when we think about where patients are wanting to get procedures done. Certainly, as we think about our focus from our offense standpoint, as we think about the ASC, we are seeing the shift happen across our product line. So certainly, we expect that to continue to go. We've talked about that there is an opportunity for that to continue to grow over time. Certainly, there are capacity constraints as ASCs are built out that will allow that continue to grow faster. But that's a shift that was already started and we don't see that slowing down anytime soon.
Kevin Lobo, CEO
And I'd just like to add that outside of large joints, we also have our sports medicine business. That's within endoscopy. It grew 30% in the fourth quarter. So that's a great sign of the overall success that Stryker is having in ASCs, that really terrific growth in our sports medicine business.
Operator, Operator
Our next question comes from Pito Chickering from Deutsche Bank. Pito, please go ahead.
Pito Chickering, Analyst
Hi, good afternoon guys. Thanks for taking the questions. As hospitals are filling with the labor pressures in 2022, it could impact hospital cash flows. So are you seeing hospitals take a pause with capital purchases until they understand how the cash flows will be impacted by these labor costs? I understand that the order book is quite strong. Just thinking about how you're going to refresh the order book.
Preston Wells, VP of Investor Relations
Yes, Pito. No, we are not seeing that at all. I mean, what we've continued to see throughout the pandemic, and while some of it early on was aided by some of the CARES funding and things of that nature, we are seeing strong balance sheets and we're seeing the continued need for capital products. Certainly, as we think about the capital products that we supply that are either lending towards revenue generating for the hospital, or towards safety and outcome for the hospital. So we're definitely seeing a continued strength in terms of the capital demand, especially for our products. I mean our order book, as we'd said, is really strong heading into the year and there's a lot of confidence given some of the products that Kevin even outlined earlier that that's going to continue throughout the year.
Pito Chickering, Analyst
Okay, great. And then a follow-up question. If gross margins are going to be impacted by 75 basis points at the midpoint, is it fair to think about some 40 basis points or so of SG&A leverage during the year in R&D flat? I just want to get a feeling for G&A versus the gross margins.
Glenn Boehnlein, CFO
Sure. As you consider operating expenses, we've prioritized R&D throughout this period because we understand its crucial role. We have not reduced funding for our innovation initiatives, whether that's in terms of personnel or technology. This commitment remains unchanged. When it comes to SG&A, we have adopted a more cautious approach. You've likely noticed our smart spending practices, especially given reduced travel. As 2022 progresses, we will continue to be careful with hiring and managing costs. However, we expect to see growth-related expenses increase, particularly in areas like customer interactions, hiring sales teams, and expanding territories. Despite this, we will keep a tight control on G&A and corporate spending to help balance these costs. That's how we foresee our operating expenses evolving throughout the year.
Operator, Operator
Our next question comes from Frank Pinal from Jefferies. Frank, please go ahead.
Frank Pinal, Analyst
Hi guys, thank you for taking the question. Just two quick ones for me on Mako, clearly, a strong quarter. You're now at 1,500 installs market lead. I'm just wondering at this point, Mako's been on the market for 7 years. And given the level of success and I think you're sort of seeing above 50% Mako procedures on Knees, above 25% on Hips. Where does that go? Does that go to 80% on Knees? Does that go to 50% on Hips over the next 5 years? And has your thinking on that opportunity at all changed U.S./OUS.
Kevin Lobo, CEO
It's great to see the growth in robotics, which is establishing a new standard of care that residents expect as they enter the orthopedic workforce. We anticipate this growth will continue along its current trajectory. With the launch of our new stem, we expect Hips may reach a turning point and see significant acceleration. We are very optimistic about the future, as robotics is becoming a mainstay, much like we've seen in other industries. In the fourth quarter, we experienced an unusually high number of installs in competitive accounts, exceeding normal levels. We believe that the entry of new competitors is increasing the exposure of our systems and generating more interest in Mako than before, which benefits the industry overall. Regarding international expansion, we are still in the early stages, similar to other robotic technologies that start locally and expand globally. Although we are just beginning in markets like Japan, China, and Latin America, we are seeing significant growth and high levels of interest. While the pathway might be slower, the potential in international markets is very exciting.
Frank Pinal, Analyst
Great. And just a quick follow-up. I'm just wondering if you have any updates on the spine or shoulder opportunity in robotics and if you put any sort of brackets around that with respect to timing or milestones at this point?
Preston Wells, VP of Investor Relations
Frank, it's Preston. So at this point, as we said before, with regards to both of those different platforms that we certainly have active projects that are working on them. They are key priorities for our development teams. But at this point, we still do not have a timeline that we are sharing.
Operator, Operator
Our next question comes from Mike Matson from Needham & Company. Mike, please go ahead.
David Saxon, Analyst
Hi, good afternoon. This is David Saxon on for Mike. Thanks for taking the questions. My first one is just on Spine. Just wondering if you have any sense of if you've gained or lost share in the quarter. And then looking at 2022, do you think you can grow off that 2019 base? And then, I'll just ask my second question upfront. On the Foot & Ankle market, I think you've called out some weakness there. Just wondering if that's just a weak market or if you're seeing anything on the competitive front?
Preston Wells, VP of Investor Relations
Yes. So let me address your Spine question first. I think as we've said in general throughout the pandemic, it's just very hard to get a read on how share changes are happening given some of the COVID impacts and how they impact different things regionally also just in terms of where we are in the reporting cycle. It's very early. Certainly, with Spine, just like we saw with Hips and Knees, it was impacted from a COVID perspective throughout the quarter early on as we try to recover from Delta and then with Omicron coming in later on in the back part of the quarter. So not easy to say where everybody is going to shake out from that standpoint. But certainly, outside of COVID, outside of the staffing issues that we talked about as well, we are pleased in general with our product portfolio, including enabling technologies that we have in the Spine area. As we come back from COVID and as COVID abates, we would expect the growth to uptick in that area. And certainly, as we do with all of our businesses, expect to see growth on that business as we talk about year-over-year. With regards to Foot & Ankle. Foot & Ankle, the market is still a very strong market. It's one that we're very happy about to be in. But unlike other products within the trauma or even upper extremities, Foot & Ankle was much more impacted from a COVID perspective during the quarter. And we've seen that throughout the year. But certainly, as COVID abates in that area as well, we would expect growth to really drive there. And Kevin mentioned we have several product launches that are going to be happening in that space as well that we're very happy about. So we definitely look for growth, certainly, as COVID is starting to abate a bit to really see the growth take off in that area.
Kevin Lobo, CEO
Yes. Just to put a fine point on the Foot & Ankle. So it's really the forefoot procedures that are a little bit more elective and that's where a number of our launches will happen. The Total Ankle Replacement was actually terrific in 2021, really great growth and we're going to continue to have very strong growth in Total Ankle Replacement. It's really getting the forefoot procedures to come back to the office. And as that grows, we will continue to grow. And a lot of our launches are MIS products, specifically for forefoot.
Operator, Operator
Our next question comes from Chris Pasquale from Guggenheim Securities. Chris, your line is open.
Chris Pasquale, Analyst
Thanks. One question, high level for you, Kevin and one specific one on Neurovascular. So given how entrenched you guys are in the hospital, I'm curious that you're thinking about the staffing challenges that we're hearing about around the health care complex. You shared some assumptions around when COVID and supply chain issues might ease. When do you think we might put the staffing piece behind us?
Preston Wells, VP of Investor Relations
Yes. So just in terms of staffing, this is Preston. Just similar to some of these other headwinds that we talked about, the staffing challenge is a real one that certainly seems to be much more pronounced in periods of high COVID infection rates. Obviously, as those nurses are either doing other things or in fact, impacted themselves from a COVID standpoint. So we certainly do expect the staffing challenge to remain throughout the rest of this year. But we are seeing hospitals try to find ways to deal with it, whether it's looking at traveling nurses or adjusting wages or even adjusting how they're scheduling to get through that. So while it will be a bit of a headwind, we certainly think that it's something that we will be able to work through. And as procedures return, we certainly expect to get the procedural volumes back to the levels that we would want them to be.
Chris Pasquale, Analyst
Okay. So you don't see that as an impediment to a bounce back in activity once COVID recedes?
Preston Wells, VP of Investor Relations
No.
Chris Pasquale, Analyst
Okay. And then just quickly on Neurovascular. There's a competitor recall in the flow diverter segment during Q3. Just curious how much you think that benefited you and if you've been able to take advantage of that to get into some new accounts?
Kevin Lobo, CEO
Our flow diverting stent business has been a significant strength for us, and it's primarily about training surgeons on the product rather than competitive activities. The Evolve stent is relatively new in many markets and has not yet been launched in all countries. We are excited about the product, and it has been growing at a healthy rate. There hasn't been any change or inflection point related to competitive activity.
Operator, Operator
Our next question is from Matthew O'Brien from Piper Sandler. Matthew, the floor is yours.
Matthew O'Brien, Analyst
Hi, good afternoon. Thanks for taking the questions. I guess just bigger picture question for starters is you kind of said at the Analyst Day, you're about an 8% top line grower, you're guiding now 6% to 8%, so 7% in the midpoint, 100 basis points, $170 million roughly. I'm just wondering this year, if that's really all just conservatism around the impact of COVID or if there's just some supply issues that are going to cause you to just have to back order a bunch of products and that's why you're taking it kind of down about 100 basis points versus where I think we had all kind of expected the top line guidance for the year? And then I do have one follow-up.
Preston Wells, VP of Investor Relations
Yes. So Matt, I think as we look at 2022 and as we enter the year, similar to what we've seen in 2021, I mean, there still continues to be a lot of variability with just COVID. And so if we think about how we've entered this year with COVID being pretty high in some places and while this variant seems to happen very fast and it seems to be peaking in some areas which is encouraging, what we can't predict is where the next wave is and what might happen from a next wave standpoint. So there's a lot of variability just as we think about COVID and then we add on top of that some of the challenges and the headwinds from a supply chain perspective. And it's not to say that there's a big bolus of supply chain issues that we have. But just in general, if we think about electronics and components and some of the challenges just with supply across all industries, that's certainly something that's out there in front of us as well. So there's just a lot of variability as we think about this year in terms of some of those top line aspects that is one of the reasons why we have that wider spread and maybe a little bit lower than what some others were expecting. That being said, as Kevin outlined, there are some really, really good tailwinds that we do have as we think about entering this year, whether it be our Mako installation base and how that's going to portray into future sales there. Also the new product launches that he's outlined. Of course, we have the Vocera deal that we're hoping to close this quarter as well. So there's a lot of positive momentum that we have across our businesses that we're going to take into this year and so we're really pleased with that. But just balancing that with some of those headwinds that I outlined as well.
Matthew O'Brien, Analyst
Okay. But you are assuming another wave then, Preston, just to be clear on that, in the guidance?
Preston Wells, VP of Investor Relations
Yes. As Glenn outlined in the guidance that he went through, we do have some of that assumed in that spread that we have.
Operator, Operator
Okay. As a follow-up, Kevin, your remarks about gaining competitive market share and increasing Mako accounts among competitive customers really stood out to me. I'm curious if there was significant trialing during Q2 and Q3, leading up to a strong Q4 in system placements and sales. Were most of those additional system placements in accounts that currently have a competitive robot or are in the process of launching one?
Kevin Lobo, CEO
I don’t typically go into that level of detail. What I can say is that we used to estimate the mix as being around 50% to 60% in competitive accounts, but it exceeded that in the fourth quarter. I’m not sure if this is just a one-time occurrence or if it will persist. Many accounts were waiting for other products to hit the market, and once those were available, they began trials. In some cases, it was their first robot, while in others, it might have been their second or third. I don’t have precise details, but the level was higher than we’ve seen before. I wasn’t anticipating it, but it surpassed my expectations. I do expect Mako to keep growing, which isn't new information; it's just that the competitive mix was stronger than in the past. We’ll see if that trend continues. However, the order book for Mako and MedSurg capital is robust at the end of the year, indicating that momentum should carry into 2022.
Operator, Operator
Our next question comes from Steven Lichtman from Oppenheimer. Steven, please go ahead.
Steven Lichtman, Analyst
Thank you. I have a question about the supply disruptions, especially regarding electronics. Is the impact limited to Medical, or could it also affect your ability to meet demand in Mako?
Preston Wells, VP of Investor Relations
So the impact is primarily impacting our Medical business but there are some smaller impacts that we're seeing on some of the other MedSurg-related businesses. As we think about Mako, as we entered into 2022 and the expected demand that we have for Mako, we feel comfortable where we are in terms of supply and any impacts on Mako are minimized at this point.
Steven Lichtman, Analyst
Okay. And then you guys mentioned, I think, versus 2019, international performance was better than U.S. on an organic basis. As you look into '22 in your guidance, do you assume constant currency growth for international which will continue to be ahead of the U.S. or is it more balanced? How are you thinking overall about your international business versus U.S. as you look into the theater?
Preston Wells, VP of Investor Relations
Yes. Well, we don't provide guidance at that level. We don't expect the momentum that we've generated throughout this year to slow down as we think about our international business. And quite frankly, as Kevin has pointed out in the past, this is something that we've been building towards as we think about our focus on international markets. And so there's no reason to believe that, that will slow down.
Operator, Operator
Our next question comes from the line of Matt Taylor from UBS. Matt, please go ahead.
Matt Taylor, Analyst
Hi, thank you for taking the questions guys. Just had two quick ones. One is on the supply chain assumptions, I didn't detect in your comments that you were saying supply chain specifically was impacting revenue. Is it all a cost impact? Or is there actually some product that you're not able to get out because you can't get componentry and the like?
Preston Wells, VP of Investor Relations
Yes. So I think it's a bit of a mixed bag. So there certainly are inflationary pressures that we're feeling as a result of the supply chain and just constraints on certain materials like electronics. But that is also, in some cases, leading to some delays in terms of getting some products out. So we do have a bit of a mix as we think about supply and certainly, the procurement team, the direct procurement team is working on actively securing as much as possible. But as Glenn mentioned, sometimes what that means is going outside of our contracts into spot buys and that's what's generating some of the larger inflationary impacts as we think about the guidance that we gave. Obviously, our goal is to protect our customer needs as best as possible as we go through this but there certainly is an impact on both the top and the inflationary pieces that Glenn outlined as well.
Matt Taylor, Analyst
Okay, that makes sense. That's helpful. And then just one other follow-up. So it's encouraging to see the strong capital trends, especially in Mako. I guess I was wondering if you are seeing any places where capital purchasing has been weak. And I'm thinking especially beds; I think some investors are concerned that maybe beds were pulled forward because of the pandemic. So I would love any comments on that pluses and minuses in capital spending that you're seeing?
Kevin Lobo, CEO
Actually, our capital order book is strong across the board. And in particular, beds had a terrific finish at the end of the year in terms of orders, a huge number of orders for our new ProCuity bed. So it's a new launch. It takes some time to go through the trialing process but we're extremely excited about our bed business. I think Glenn highlighted that in his remarks but the orders for our beds are very high, very strong. And we now have to build all the beds and make sure we have all the parts to be able to ship them all but we're very excited about the momentum; so it's broad-based. It's in our emergency care area, it's in Mako, it's in beds, it's in the Instruments division, the Endoscopy division, capital across the board is strong.
Operator, Operator
Our next question comes from Joshua Jennings from Cowen. Joshua, your line is open.
Joshua Jennings, Analyst
Hi, good evening. Thank you. Kevin, I have two questions regarding the pipeline. You made a significant move by integrating robotics with the Trauson Knee. I would like to know if there has been any change in strategy concerning the implant segment. Additionally, is 3D printing for transplant implants still cost-prohibitive? How do you envision the evolution of knee implants moving forward under Stryker? For my second question, regarding the robotic advancements in spine and shoulder, are there any other areas, particularly in Neurovascular, where you see potential for robotics or standout applications in neurovascular or any other Stryker business segments?
Kevin Lobo, CEO
Thank you. We prefer to wait until we have validated information before discussing it. We are examining femurs, specifically cobalt chrome using various manufacturing processes. When we are ready to share more details, we will. We have automated the process for the cementless portion of the femur and are exploring different surface materials, though we are not prepared to announce anything yet. We are pleased with the Trauson design. As you know, we introduced a 3D printed tibial baseplate and patella that support the cementless solution without fundamentally altering the design. We’ve introduced one millimeter inserts and made modifications to create a more personalized knee solution, but these are not major redesigns. Therefore, do not expect any drastic changes. However, we are developing some items that we will share regarding the knee. On the hip side, we are excited about a new implant designed for direct anterior use, and we have an excellent 3D-printed hip cup. We have observed that many surgeons prefer using our cup with a competitor's stem, and with this new stem, we aim to convert all of that business, which is promising. For the knee, I do not anticipate any significant innovations at this time, but we are working on developments that we will disclose when appropriate. Regarding future applications, we recognize that robotics present challenges. Our primary focus is currently on shoulder and spine, with some exploratory projects in other areas. However, I’m reluctant to discuss those until they are better established. In spine and shoulder, robotic applications are forthcoming; although we do not currently have a timeline, our teams are making solid progress on these projects.
Operator, Operator
Our next question comes from Shagun Singh from RBC. Your line is open.
Shagun Singh, Analyst
Great. Thank you for squeezing me in. Just a couple of quick ones from me. Firstly, what are you assuming specifically for margin expansion in the first half and the full year? And then on China, VBP, do you expect trauma and spine to be included in this year's announcement? And then just lastly, on ASCs, it's a major theme that we're hearing from hospital companies, including from HCA this morning that ortho is the latest category that's in transition from inpatient to outpatient. And I think Kevin previously had indicated about that you expect about 50% of procedures to transition and I think you gave a timeline as well. Can you provide us with an update there?
Glenn Boehnlein, CFO
Okay, this is Glenn. I'll respond to the first question regarding margin expansions. We weren't able to provide specific guidance on margin expansion due to significant volatility. We aimed to give you some insight into the pressures affecting our gross margin, which we expect to be more pronounced in the first half of the year compared to the previous year. That's all the guidance we'll offer on margin for now. I'll turn it over to Preston.
Preston Wells, VP of Investor Relations
So yes, Shagun, just back to your ASC question, as I talked about before, we do expect that transition to continue. In terms of a timeline, I mean, I think a lot of it is just going to depend on how capacity is built and how we're able to continue to transition patients and surgeons to that setting. Certainly as we think about the ASC offense that we've created, we are here and actually helping to make that transition happen. So we certainly would expect our large joints to continue to make that shift as well. And I apologize, I forgot your second question that you had in there.
Operator, Operator
Our next question comes from Jayson Bedford of Raymond James. Jayson, please go ahead.
Jayson Bedford, Analyst
Good afternoon and thanks for taking the questions. Just a couple of quick ones. First, it's a little granular but in those geographies that have seen COVID cases that have rolled over, have you seen a pickup in volume growth?
Preston Wells, VP of Investor Relations
So I would say that it's spotty. I mean I think just like how we thought about COVID throughout the last 24 months or so, you will, as COVID cases start to decline and as hospitals are able to get capacity up and running, we know they will. And so certainly as that happens with this wave, we will start to see procedures picking back up in those areas as well.
Kevin Lobo, CEO
But it does vary by market. So in Australia, we definitely saw a big pickup as soon as they resume electives, the pickup is pretty swift. I would say the U.K. is similar. But then in other markets, whether it's Japan or whether it's Southern Europe, it's a little bit more gradual, the increase. So there isn't one answer but we do know is these patients are going to need their procedures. The pace of the recovery, honestly, is quite difficult to generalize because it does behave differently by country. We are expecting that there will be a pickup and we look forward to that.
Operator, Operator
Okay, great. Thank you. And our last question today comes from Jeff Johnson from Baird. Jeff, your line is open.
Jeff Johnson, Analyst
Thank you. Good afternoon. Most of my questions have been answered, but Glenn, I completely understand that you haven't provided guidance on the operating margin. However, when I consider your revenue guidance, gross margin guidance, and EPS guidance, it seems that, in simple terms, the operating margin could potentially increase slightly or decrease by 30 to 40 basis points. Am I on the right track with my calculations, or should I reevaluate them?
Glenn Boehnlein, CFO
Yes, Jeff, I believe your calculations are quite clear. I assume that your model will likely take all these factors into account.
Operator, Operator
And Mr. Lobo, I have your closing remarks.
Kevin Lobo, CEO
So, thank you all for joining our call and for all your questions. As you can see, we had a very strong finish to 2021. We are working through the challenging environment right now. And you can see that the company is well positioned to fight through it. We are going to continue to invest for the future and make sure that as things improve in the environment that we're poised to capitalize on that and we look forward to sharing our first quarter results with you in April. Thank you.
Operator, Operator
Thank you. This concludes today's conference. Thank you for participating. You may now disconnect your line.