史賽克 (SYK) 2016 Q4 法說會逐字稿

Welcome to the fourth-quarter 2016 Stryker earnings call. My name is Amanda, and I will be your operator for today's call.

(Operator Instructions)

This conference call is being recorded for replay purposes. Before we begin, I would like to remind you that the discussions during the 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 would now like to turn the call over to Mr. Kevin Lobo, Chairman and Chief Executive Officer. You may proceed.

Welcome to Stryker's fourth-quarter earnings call. Joining me today are Glenn Boehnlein, Stryker's CFO, and Katherine Owen, VP of Strategy and Investor Relations. For today's call, I'll provide opening comments, followed by Katherine with an update on MAKO. Glenn will then provide additional details regarding our quarterly results, before we open the call to Q&A.

With Q4's organic revenue growth pf 6.7%, we delivered on our stated goal of achieving sales gains at the high-end of med tech. And despite tough year-over-year comparisons, Q4 represented our highest growth quarter, reflecting continuing momentum throughout the year. Overall, it was another strong year for the Company.

We have shown remarkable consistency of top line performance over the past four years. We continue to complete value creating acquisitions. Our globalization efforts are bearing fruit, and we are also building capability to deliver consistent leveraged earnings. All of this is enabled by an outstanding team of high-performing leaders.

Our sales growth was balanced across our three groups, orthopedics, MedSurg and neurotechnology and spine, once again underscoring the diversified revenue model. On a geographic basis, the US was up 6.3% organically, while sales outside the US posted a solid 7.7% increase, driven by another strong performance in Europe, as well as year-over-year gains in emerging markets, including China, which returned to growth due to soft comparisons.

We would also note the performance of our acquisitions, particularly Sage and Physio, which posted adjusted growth in Q4 of 11.8% and 7.4% respectively. As a reminder, these two deals will begin to positively contribute to our organic growth in Q2 as they anniversary.

With the strong top line performance, along with ongoing efforts around cost transformation for growth, adjusted per share earnings increased 14.1% to $1.78 a share, which represents the high-end of our $1.73 to $1.78 range. These results were achieved while maintaining a healthy investment in R&D, to continue to drive future growth.

As we look ahead to 2017, our sales and earnings targets reflect our continued commitment to deliver sales growth at the high-end of med tech and leveraged earnings. With the strength of our diversified model, our dedicated business units, and sales teams, coupled with our innovative product pipelines, we believe we are well-positioned to deliver on these commitments.

With that, I will now turn the call over to Katherine.

Thanks, Kevin.

My comments on today's call will include an update on MAKO. We completed 2016 achieving continued success with MAKO, as we installed a total of 32 robots globally, of which 24 were in the US. For the full year, MAKO installations totaled 86, an increase of 14 year over year, which brings the total number of robots globally to 381 with 333 in the US.

During Q4, we expanded the limited market release to include additional sites, which will serve as training centers as we move toward full commercial release at the upcoming AAOS meeting. It's also important to note that in addition to installing new robots, during Q4, our MAKO capital specialists also begun upgrading existing robots, to enable the total knee application. This includes additional capital, as well as software.

Going forward, our MAKO specialists will continue to focus on new robot installs, as well as the multi-quarter process of upgrading existing robots. The revenue associated with the upgrade is included in other ortho revenue along with new robots, bone cement, and SPS related sales.

Given the measured pace of the limited market release, we feel well-positioned to moved into the full commercial launch, with a training protocol that will optimize outcomes for surgeons. We continue to focus on knee market share gains as the best barometer of the success of MAKO, and believe we will see evidence of its impact as we exit 2017. We look forward to the upcoming AAOS meeting, where as you can imagine, MAKO will be the primary focus.

We will host an investor event with members of our senior leadership team, along with a MAKO surgeon, to help answer your questions. We will also host a booth tour, as we've done in prior years, which will include a MAKO segment, along with other key new product launches.

We hope you will be able to join us at the meeting. And with that, I'll now turn the call over to Glenn.

Thanks, Katherine. Today, I will focus my comments on our fourth-quarter financial results, and key performance drivers. Our detailed financial results have been provided in today's press release.

Our organic sales growth was 6.7% in the quarter, with no difference in selling days. This was slightly above our full-year organic growth of 6.4%, which was at the high-end of our latest outlook range of full-year expectations of 6% to 6.5%. Pricing in the quarter was unfavorable, 1.5% from the prior year, while foreign currency exchange had an unfavorable 0.6% impact on sales.

For the quarter, US sales continued to demonstrate strong momentum, with organic growth of 6.3%, reflecting solid performances across our portfolio, especially in MedSurg and Neurotech. International sales grew 7.7% organically, highlighted by gains in Europe, Canada and Australia, and as we expected, a return to growth in China, as prior-year comparables eased.

Our adjusted quarterly EPS of $1.78 increased 14.1% from the prior year, reflecting strong sales growth, accretive acquisitions, and good operating expense control. Our fourth-quarter EPS was negatively impacted $0.03 by foreign currency exchange.

Focusing on our segment highlights for the quarter, orthopedics delivered constant currency growth of 5.7%, and organic growth of 5.3%, led by the US with organic growth of 5.9%. These gains reflect continued momentum in US trauma and extremities at 8.4%, and knees at 5.7%. Underlying this growth is strong demand for our 3D printed products, our foot and ankle portfolio, and our MAKO platform, which installed an additional 32 units in the quarter, including eight outside of the US.

Orthopedics international delivered constant currency growth of 4.8%, and organic growth of 3.9%, led by our European businesses. MedSurg posted strong gains across all businesses in the quarter, with constant currency growth of 32%, and organic growth of 8.3%, which included a 7.4% increase in the US. Instruments, which grew US sales 6% organically, maintained good momentum, with its waste management business and newly-launched Neptune 3.

Endoscopy delivered US organic growth of 5.9%, which underscores the strength of this product portfolio, including its video products, which includes the highly successful launch of the latest generation 1588 AIM camera platform, as well as communications, booms and lights products, and its sports medicine business. The medical division had US organic growth of 11.1%, driven by growth of its core bed, stretcher and power cot products. On a comparable basis, medical's Physio business was up 7.4%, and its Sage business grew 11.8%. Both Sage and Physio continue to be accretive to Stryker, and our integration efforts are progressing as planned.

In 2017, we continue to expect double-digit growth from Sage, and for Physio to be accretive to Stryker's growth rate. However, there will be pronounced seasonality with Physio, as they switch from a March 31 year end to Stryker's calendar year end, resulting in a soft first quarter, and stronger Q2 through Q4.

Internationally, MedSurg had constant currency growth of 29.4% and organic sales growth of 11.4%, which reflects strong European and Australian sales, and some easing of the MedSurg comparables in China. Neurotechnology and spine continues to drive above market performance, with constant currency growth of 8.6%, and organic growth of 6.7%. This growth reflects continued strong demand for our Neurotech products.

US Neurotech posted organic growth of 11.4% in the quarter, highlighted by continued strong demand for our neurovascular products, including our Target coils and AIS products, CMF products, and our neuro-powered instruments. Our spine business in the US continued to see some supply issues, offset somewhat by strong demand for our IVS and 3D-printed interbody Tritanium products. We expect these supply issues to continue into the first quarter of 2017.

Internationally, neurotechnology and spine had constant currency and organic growth of 11.6%. This performance was driven by a continued strong demand for our Neurotech products in Europe and Asia. Spine's international growth was also impacted by the aforementioned supply issues.

Now, I will focus on the operating highlights in the fourth quarter. Our adjusted gross margin of 66.3% was down 90 basis points from prior year. Gross margin was favorably impacted by absorption and productivity gains, which was more than offset by unfavorable mix, including the impact of acquisitions and foreign currency exchange.

Our adjusted SG&A of 32.6% of sales was 110 basis points favorable to the prior-year quarter. This improvement reflects favorable leverage from our continued focus on operating expense improvements through our CTG program, cost containment efforts, and business mix, including leverage from our recent acquisitions. Meanwhile, we continue to invest in internal innovation, with Q4 R&D spending totaling 6% of sales, and full year totaling 6.3%.

In total, adjusted Q4 operating expenses were 38.6% of sales, which was 110 basis points favorable to the prior-year quarter. These results continue to reflect our focus on leveraged growth.

In summary, our adjusted operating margin was 27.7% of sales, up 30 basis points from the prior-year quarter. Or full-year operating margin was up 60 basis points from prior year. This performance reflects the positive results from our various CTG programs, continued cost control, and favorable accretion from acquisitions, offset by business mix, pricing, and foreign exchange. We remain confident in our ability to deliver on our commitment of driving 30 to 50 basis points improvement in our operating margin annually.

Lastly, I will provide some highlights on other income and expense. Other expenses increased, due primarily to higher net interest expense, related to increased borrowings at the end of the first quarter, partially offset by the retirement of $750 million of debt in the third quarter. Our fourth-quarter adjusted effective tax rate of 16.7% reflects the benefits of our global tax structure, partially offset by the impact of higher US-based income from our recent acquisitions.

Moving on to the balance sheet, we continued to maintain a strong balance sheet, with $3.4 billion of cash and marketable securities, of which approximately 84% was held outside the US. Total debt on the balance sheet at the end of the year was $6.9 billion.

Turning to cash flow, our full-year cash from operations was approximately $1.8 billion. Finally, while we've previously announced that we have suspended our share repurchases for the remainder of 2016, we have lifted that suspension for 2017. We expect to repurchase approximately $250 million of shares, essentially, to offset the impact of dilution in 2017.

And now, I will provide our 2017 guidance. Based on our momentum from 2016, and our assessment of the current economic and market conditions, we expect organic sales growth to be in the range of 5.5% to 6.5% for 2017. There's one less selling day in 2017, as compared to 2016.

As you update your quarterly models, please note that Q1 has one more selling day, both Q2 and Q3 have one less selling day, and Q4 has the same number of days. Additionally, you should expect to see the relative proportion of earnings by quarter in 2017 to be similar to what you saw in 2016.

If foreign currency exchange rates hold near current levels, we anticipate sales will be negatively impacted by approximately 1% in 2017. We also expect continued unfavorable price reductions of 1.5% to 2%, consistent with the pricing environment experienced in 2016.

In addition, we expect our CTG program and other cost containment measures to add 30 to 50 basis points of operating margin in 2017. As required, we plan to adopt the new accounting guidance required by ASU 2016-09 on stock compensation. If our shares remain at the current levels and stock tops and exercises remain at historical levels, we expect the change in accounting for excess tax benefit to positively impact net earnings per diluted share by approximately $0.07 to $0.09 in the full year, about half of which we expect in the first quarter.

Including the impact of the aforementioned new guidance related to stock compensation, we expect our full-year adjusted effective tax rate in 2017 will be in the range of 16.5% to 17.5%. Capital expenditures are expected to be approximately $450 million in 2017, as we continue to invest in our operations and IT infrastructure to support future growth. This level compares to $490 million of capital expenditures in 2016.

Based on the current foreign currency exchange rates, we expect 2017 to be negatively impacted by approximately $0.10 to $0.12 per share for the full year, and approximately $0.03 to $0.04 per share in the first quarter. This negative impact is largely driven by the translational component of foreign currency exchange, which we do not hedge. The transactional impact of foreign currency exchange on earnings is mostly being offset by our hedging program, which we continue to layer in to our operations.

Finally, for 2017, we expect adjusted net earnings per diluted share to be in the range of $6.35 to $6.45 for the full year, including approximately $1.40 to $1.45 in the first quarter. This guidance includes the aforementioned impact of FX, as well as accounting for stock compensation. Now, I will open up the call to Q&A.

(Operator Instructions)

Mike Weinstein from JPMorgan.

Really, I think everything, as you've laid it out in San Francisco, looks very consistent here. Kevin, just want to get your two cents on a couple of items. Number one, as you look at 2017, and you think about the potential for the MAKO momentum, benefiting at least your US knee business and your capital sales and the orthopedic business, is there anything you see in 2017 that might not do as well?

I would think the instruments business has a stronger year, and the spine business has the potential to recover. What's the offset that might keep you at the lower end of your 5.5% to 6.5% range? Obviously, we all see the potential for you to move to the higher and.

Thanks, Mike. Obviously you've seen the last two years we have grown organic sales greater than 6%. We exited the year with very good momentum across our portfolio, except for spine. Spine had a tough year this year, issues will continue into the first quarter. We expect spine to improve starting on the second quarter.

We also have tough comparables. You've seen the type of growth we had in the fourth quarter, we grew 6.5% on top of the 6.4%. So tough comparisons and the unknown. Things can happen in the marketplace that you don't anticipate.

That's why, I think bracketing 6% shows consistency, and we feel very good across our businesses. As the year unfolds, we'll see. MAKO is something we've never done before. It's a very big launch.

We were the fastest-growing knee in 2016 without a big impact from MAKO, but there's a lot of unknowns as we do this launch. I think it's prudent to put the range in that, we're certainly leaning into start the year with 5.5% to 6.5%. It certainly a stronger position than we've had the last few years.

One follow up, here. Are there any geographies in particular? You've gotten through your tough comps, if you would, in China and Brazil. So, that obviously looks better going into 2017. Europe is coming off of a very strong 2016. Any geographies that you are concerned about, or you want to highlight?

Well, I think the macroeconomic uncertainty is the big factor in foreign currency. Foreign currency doesn't impact our organic growth. Those are the two things we worry about. Macroeconomics, there are elections that are going to be going on in Europe that could create uncertainty. Brazil seems to be getting, improving, but it's always so volatile.

China, we are not out of the woods, yet. Certainly, we have low comparisons, but we have of a lot of work to do to improve in China. I would say the areas of the world that concern us are the same that we've had in the past, primarily related to emerging markets. And in Europe, there some macroeconomic uncertainty, with a number of elections happening in the year.

Kristen Stewart from Deutsche Bank.

I just wanted to go through the guidance and make sure I'm understanding this. The $3.65, the $6.45 does include the change in stock compensation, correct, of $0.07 to $0.09?

Yes. That's correct.

How should we think about the incremental acquisition, accretion falling through? Are you reinvesting that? Or, should we think about the impact from the stock compensation is basically offsetting the larger headwind that you're expecting from FX this year? Or the benefit to reinvest the accretion from last year as you're talking about through 2017.

First off on the accretion, we still maintain that will drop through, based on the guidance we provided of $0.15 to $0.18. As far as FX, right now, given where currencies are, for the most part, it's offset by stock compensation. But I can't necessarily forecast where that will fall out for the whole year. We will continue to provide transparent guidance relative to translational risk on FX.

Thank you. Bob Hopkins from Bank of America.

First question, Kevin, is for you. I wondered if you could comment a little bit more on the strength you are seeing in your growth rates outside the United States. Especially in hips and knees, so maybe some color on where that is coming from? Are you gaining share, is that market expansion? Some color on the really strong O-US growth we saw in the fourth quarter, and then I have one follow-up.

Thanks, Bob. We're really pleased with our performance in Europe. As a second year in a row that Europe is growing north of 6%, and really very strong performance from our replacement business in Europe.

Canada also had a very strong Q3, Q4. As you know, we rolled Canada into our trans-Atlantic operating model at the beginning of 2016, and they had a very strong finish to the year. It took two quarters to get Canada going, but it really had terrific performance.

I would say across the board, we had good performances in many of our regions. We have a significant MAKO presence already in Australia, and we placed a number of machines outside the United States. Even if they are not yet doing total knees, it is a catalyst to provide growth. Really strong performance.

The countries that really stand out, I would say, would be Europe, for sure. Some recovery in China and Canada, as well. Those are the main markets.

Okay. Great. For a follow-up, I want to ask you a question on MAKO/capital spending environment. On MAKO, if you could give us a little more color on maybe how the training is going? Any other metrics you are willing to share on training and how we should think about the rollout in 2017 in terms of placements?

I was wondering, it's early, I realize, but are you seeing any signal at all from the market that hospitals might be more cautious in terms of spending on capital, because of the political environment we are in and the risks around ACA? Are you seeing anything, at this point, on that front?

Bob, it's Katherine. I will take that question and start with the second part of the short answer is no. We haven't seen anything related to ACA concerns. You saw really strong growth in our medical organic business, on top of the acquisition, it's the strongest Q4 business. Right now, there's no evidence that there's been any impact, and we feel good about the capital environment, as well as our momentum in that market, overall.

In terms of MAKO, we do think we are really well positioned, since we did take a very deliberate, limited launch, to really get the training protocol optimized. As you heard at our analyst meeting, we're really pleased with what we've seen so far. We've continued to expand the training sites. We have got roughly 50 surgeons trained.

It's important that they've done sufficient volume, because they'll serve at the training centers as we going go to the full commercial launch, which we continue to target at the Academy meeting. We will continue to report on installs going forward, we just also highlighted, though, that they're also going to be upgrading some of the fleet that's already out in the field. Again, we feel really well positioned, and think as we look towards exiting 2017, we will start to see a clear indication that the total knee application is helping us drive meaningful share gains.

David Lewis from Morgan Stanley.

Just a couple quick ones here. Glenn, maybe starting with you. The top line guidance was better than we expected by at least 50 basis points. When I think about the bottom line, your currency was pretty in line. You're obviously better on the top line and you obviously had a couple more pennies on stock comp than we thought.

Are there any select investments? I appreciate your bracketing consensus. But are there any select investments you are choosing to make your early in 2017? Which is why maybe some of that top line benefit is not dropping through, or is it a conservative tacked on currency, perhaps, early on in the year? It looks like the bottom could be better to us, based on that very strong top line.

David, I don't necessarily think there's anything that warrants pointing out. There are the obvious investments we have talked about, especially our MAKO launch. But, other than that, we are continuing to invest in our CTG program, but that's a continuation of things we started last year. And then we will continue to maintain our robust R&D spend as well, internally.

Okay. Two quick product questions. Maybe one for Kevin and one for Katherine. Katherine, on MAKO, this quarter MAKO system number is in line with our number, probably a little below the Street's, and it's all tied to that de novo placement versus upgrade dynamic. Does that play that play all through the balance of the year, Katherine? As we get to the second half of the year, should we start sing a greater reliance on de novo system placements versus upgrades?

For Kevin, just neurovascular, that business slowed a little bit in the latter half of this year, obviously on very, very strong comps. Could you talk about the outlook for neurovascular 2017-2018? Any key product launches we should be focused on, on that business, which has been a key growth driver? Thank you.

In terms of MAKO, we are going to continue to install new robots, and as I mentioned there's a lot of robots out in the field, a significant portion of we expect to upgrade to the total knee over a multi-quarter period. Exactly how that plays out, we are only a quarter into upgrading. We will just have to wait and see how that plays out over the course of the year, but will be a mix, obviously, of new robot placements with the same capital sales force, MAKOplasty specialists also doing the upgrades.

As it relates to neurovascular, David, we still feel very bullish about the market. You saw in Q3 both our results and the other major competitor had a bit of a softer Q3, and a nice bounce back in Q4. If you look at the full year, certainly in the US, our growth was 14.5% off the base of 15.6% the year before and last year's fourth quarter was 16.7%, this year's fourth quarter 12.8%. We're talking about pretty good double digit growth.

There was one little blip, and I will think we are going to see that with the ischemic market. The ischemic market, which is the very, very robust growing market, it's going to be a little choppy from quarter to quarter, as new sites get established, new complete stores get established. Getting that care pathway defined. We remain very bullish on the long-term prospects and continue to expect double digit growth. Since we've acquired that business, every year, they have had double digit growth, and expect that to continue in the future.

Matt Miksic from UBS.

One follow-up on MAKO, and then I had one broader question for you, Kevin, if possible. Katherine, to make sure we understand this process, it sounds like you're getting your training sites up to a level of volume where they're going to start doing more significant training. That won't really happened until the end of this quarter, just to put a finer point on it? Is that when we expect training to really start kicking in?

Yes. When we say we go to full commercial launch at Academy, that means we will have a sufficient number of surgeons trained on sufficient volumes of procedures, and located throughout various locations, geographically, that they can meet the demand for additional surgeon training going forward. That's exactly how you should think about it.

Okay. Training starts kicking off. We got those folks trained, they try some cases, and towards the end of the year and we start seeing the results of all that.

Yes. What we really tried to underscore that it is a measured launch. We have to continue to install new robots, they have to get trained. They have to go out and have their entire OR staff trained and start to do the procedure. It's not a light switch. It will continue to build throughout the year, as we get more robots installed, more systems upgraded, and continue with the training.

Glenn Navarro from RBC Capital Markets.

Sorry, operator. I think we cut off the prior caller. If you could put him back in the call, I think he had a second question.

One moment.

We will put him back in the queue.

(Operator Instructions)

Operator, go ahead with the next call and we will put him back in when he has re-dialed in.

Here we go.

Katherine, I was going to ask, just to make sure I don't get popped off again, one just quick clarification. I did want to ask you a question, Kevin. The clarification on the knee volume, you are seeing -- you are taking share here right now in the fourth quarter, the last couple quarters in knees. I'm just wondering, putting MAKO aside, is there anything else we can attribute that to, or what else do you think is driving that?

It isn't a huge impact, other than what we've talked about, the halo effect from MAKO. Because obviously we don't have a lot of folks using the total application, but we've also launched new products that have really helped on the knee side. We have our revision cones and sleeves which we introduced, those are 3D printed, and they are really helping us gain share in the revision market for knees, where we were below our rightful share, if you will.

We've also launched some additional 3D printed products, our cement lift 3D tibial base plate that's helped driving a really meaningful shift of the percent of our knees that are done cementless, now. Those are probably a couple of the products that we would highlight, in addition to some of the MAKO effect that we get when we go into customers who are more open to hearing about our Triathlon line.

Kevin? The question I wanted to ask you, it's one we get a lot, and we think about a lot. The range of scenarios that we're looking at here in the first half, with actions coming out of DC. I'd love to hear just if you are thinking about -- you must be thinking about, planning around variability or uncertainty as to which way things could go and what could happen. I'd love to hear about how you are positioning the business, or if you feel like you need to position the business for any variety of scenarios that might unfold, whether ACA or tax or anything else?

Thanks for the question. I don't think this earnings call is going to be a great time to go into this, Matt. There's so many different scenarios that we're looking at, whether it's around tax reform, whether it's around repeal and replace. All I can tell you is we do have a lot of those scenarios. In the interest of time for this earnings call, I don't think this is really the best time to get into it. It will take me 10 minutes to go all through of that.

Fair enough.

I apologize in advance for that. I think we'll find another forum where that will be a better place to go through those scenarios.

All in all, I can tell you, we are not overly concerned. We feel that real-world policies in general are probably a net positive for us. There are a lot of other uncertainties that we'll have to see play out.

Glenn Navarro from RBC Capital Markets.

Kevin, I wonder if you can broadly comment on the knee and hip volumes in the US and the fourth quarter? The reason I'm asking, your numbers came in better than we expected. So did Zimmer and J&J's numbers today were fine. I'm just wondering, when we add up the fourth quarter, do think there was greater seasonality in the fourth quarter?

In other words, this trend of patients holding off into the fourth quarter, was that greater than expected, or some people have asked us, is there a possibility that we have seen a pull forward of procedures, because individuals are worried about their insurance for 2017? I just wondered if you could comment on what I just said, and maybe any trends that you saw on the fourth quarter. I had a follow-up on extremities.

Glenn, I'll take the first question. We haven't seen anything with our mix of businesses to suggest that there was some type of effect tied to ACA or changes in Obamacare. The nature of our procedures really don't lend themselves to it.

The election was in November. If you think about people who get hip and knee procedures specifically going into their primary, getting referred to a surgeon, scheduling that, and then the holidays, it's not something that we saw where there was a big rush of procedures.

What we saw, and all the evidence as we've looked at this as you can imagine, suggested it was normal seasonality. We've seen a multi-year trend now of Q4 seasonality, more a function of rising deductibles than anything else. There was nothing that we would point to as a stand out in Q4, to suggest that trend was different, accelerated or indicative of greater than normal pull-through. I know you had a second question.

Just on extremities, Kevin or Katherine. Could you talk about the foot and ankle growth in the fourth quarter, and the trends your business is seeing? Can you comment on shoulders? I know that's an area that you've got a lot of new products coming out, that you're excited about. Maybe comment on foot and ankle and shoulders.

Our foot and ankle business continues to perform extremely well. Strong double-digit growth, so north of 15% growth in the fourth quarter, and that's just been a continuation of what you've seen over the past four or five years. Really pleased with the performance of that business.

As it relates to upper extremities, we're still a relatively small player, but we're starting to grow nicely. We have both the total shoulder, the reverse shoulder and then now we have a new fracture system, as well. The only thing we're missing is just the partial, that's one product left to have the complete portfolio. We have the main products that are needed to really be able to drive improved growth.

I do expect upper extremities to be a positive for us. Although we are small, and it's not a market growth story like it is in foot and ankle, we'll perhaps take share, it will take us a little longer than it did in foot and ankle to post those numbers. We are encouraged. We have most of the portfolio covered now and we're well-positioned to start to grow in opportunities.

Rick Wise from Stifel.

Let me start with capital priorities for 2017. Does the share repo suggest likely not much incremental M&A in 2017? You've done Sage and Physio, et cetera. You've got a lot on your plate right now with the MAKO launch, et cetera. We should think 2017 might be less likely to see more M&A?

You should definitely not read that into it. $250 million is a pretty modest amount of share repos, and that's really just to offset dilution. We continue to be actively looking across our portfolios for acquisitions, and we have the financial capacity to do more deals.

Obviously if the deals don't materialize over a period of time, then we may want to do additional share repurchases. Our capital allocation strategy and philosophy has not changed at all prior to these acquisitions, and we have the capacity and the willingness to do more deals. Certainly, medical had a terrific year. Organically, while integrating two big acquisitions, but our other divisions all have bandwidth to be able to take on acquisitions.

Okay. Kevin, just a follow-up, Europe, a strong performer in your words, obviously you've done a tremendous amount of positive work over the last several years, reestablishing and refocusing the European franchise. How much more opportunity is left, for want of a better phrase, catch up growth. How do we think about the right growth there over 2017 and beyond?

Europe, we expect to continue to be accretive to Stryker's overall growth rate. This is a multi-year platform for us. Europe is only about 11% of our sales. If you look at most other med tech companies, it's a much larger proportion of our sales.

We are really just scratching the surface with some of our divisions, if I look at endoscopy, if I look at instruments. We have huge growth potentials in front of us. Trauma, we already have a pretty good size business.

Even as you saw as you saw in the fourth quarter, with our hip and knee business, we are very underpenetrated in Europe versus other markets. I expect this to be a many year story, and very excited about the progress we're making, even divisions like spine are starting to turn around after years of being under-represented. Expect this at least five-plus years you should expect Europe to continue to be a really positive story for us, as we, as you say, catch up to the market shares we should be having in those regions.

Josh Jennings from Cowen.

I was hoping to first start off, Kevin and Katherine, about the MAKO halo effect. I know you've seen some benefit from some of the installs over the last couple of years with MAKO under Stryker's roof. I wondered if you could give details in terms of what units you're seeing benefit from these MAKO installs to date, and whether the halo could get bigger and broader as we get into the total knee application?

I think the initial halo that we are seeing is really more limited to our joint replacement business. If they buy a robot, even if they're not doing total knees with Stryker, with our Triathlon knee, they know that application is coming, so they will start to get familiar with the implant. 40% of those robots are in competitive accounts.

So, that's part of the halo effect, and they start to get to learn about our company, they meet our salesperson, they understand how good our service is. I wouldn't say at this point that the halo has really extended into the other divisions of Stryker. That usually takes longer, but that's what I would characterize as the immediate effect.

Great. If I could jut follow up with my understanding is you have a global hip cup launch early this year. Is that going to be at AAOS? How big of a deal should we be thinking that could be? Is this similar to the 3D tibial plates and revision cones? Or, a more moderate impact? Thanks a lot.

We are excited about this launch of the new acetabulum, a modern 3D printed version. It's not as much of a game changer as a tibial faceplate, because today, all hips are being done without cement, and this cup, even though we really like it, it's very streamlined, it has some very nice features, it's not causing you to change the way you do the procedure.

Our 3D printed knee has enabled people to not use cement anymore, that's much more of a game changer, over 15% of our knees now are done without cement. So I wouldn't look at it as explosive a launch as the 3D printed product for knees, but still, a very nice addition. We had terrific innovations over the past four or five years in our stems, and now this is a really nice innovation in our cup. But I wouldn't characterize it as a big game changing launch.

It's a nice addition to our portfolio, and hopefully that will help our sales force maintain some focus on hips. As you know, they are very excited about MAKO, and it's the same sales force selling both knees and hips. I'd say it's a nice launch, but more of an incremental launch.

Matt Taylor from Barclays.

This is Young Li in for Matt. First question, on 3D printing, we have a lot of 3D printing capability and expertise. It could be a more sophisticated manufacturing process. I was wondering if you can maybe talk about some of the areas of focus, in terms of maybe using it to introduce some new implants in orthopedics or spine?

Right now, we are actually just trying to build capacity. The demand for 3D printing has been really explosive. You've seen the growth that's been generated through our knee franchise. We're seeing same growth in spine with the interbody device, we're going to launch more products, and frankly, we've been capacity constrained in the spine area.

We have a series of innovative products and I would say our primary focus is really in joint replacement and in spine. And we're just building -- we built a whole entire building that's going to be housed with only 3D printing machines in Cork, Ireland, and we are in the process of filling that building with machinery. We are not looking to replace any of our core products.

We have the global hip cup, that's going to l be 3D printed. Think of it as launching new products, creating new innovations, and really, it's focused on those areas. For now, trauma really has some ideas and some thoughts, but nothing on the immediate horizon.

Okay. Great. That's very helpful. On MAKO, I was wondering if you could provide some comments on your utilization trends, on a per robot or per doctor basis? Just wondering how much that's changed since you bought it?

It's probably not a level of detail we are going to get into. Obviously, the value to the customers has continued to increase as we've layered on new indications, as well as being able to put our power brands onto the robots. We are really pleased, and we've been very thoughtful in terms of making sure whenever we place a robot, there are surgeon champions there to make sure these are utilized to their full capacity. So, again, we are pleased with what we've seen since we acquired it, but we're probably not going to get into that level of detail.

Kaila Krum from William Blair.

Just thinking about large joint pricing, and you enter 2017 and recognizing a lot of pressures that are out there. I'm curious if you would see an opportunity, potentially, for more favorable contracted implant pricing just with the total knees, as surgeons become more dependent on you and the robot, and how that dynamic, specifically, might be incorporated into 2017, guidance, if at all?

We assume a pretty stable pricing environment in ortho as well as for Stryker overall, as you heard Glenn, that 1.5% to 2% negative pricing that we are anticipating contemplates that. We don't assume any dramatic change in either direction in that dynamic, regardless of the MAKO launch.

Okay. Thanks. In your spine business, you mentioned a lot of the supply issues will continue into Q1. Can you give us a sense for your level of confidence that those impacted customers will ultimately return in the second quarter, and look and see at that level of confidence?

Given the strength of the portfolio overall, we've launched some new products including 3D printed that have been really well received. While it's never good to disappoint your customers, I think the strength of our sales force, their focus on the customers, and their ability to go back with differentiated products, I think they will have work to do, but we have confidence that they will be able to address those customer concerns.

One thing I was really pleased about, our spine leadership team has managed through a very tough year. When you have these product challenges, and the sales force, I was at our spine sales meeting recently. The mood was really terrific, and we were able to retain our sales force.

It's something, five or six years ago, I'm not sure we would have been as successful. A lot of that is really the plans around 3D printing and other innovations. We have a pretty good pipeline coming. We have weathered the storm, and I think we are feeling we are in a good position, and will start to see that fruit in the second quarter.

Joanne Wuensch from BMO Capital Markets.

There are two of them. The first one is, you've been very good at keeping our expectations tempered for the MAKO ramp in 2017. But how, do we think about this in 2018 and beyond as a continuously arcing adoption, or a multiplier effect? How do you internally think about the impact of your new product launches?

I think as it relates to MAKO, first of all, we've never done a launch of this magnitude, and something where we are fundamentally changing how orthopedics joint replacement is done, and that's a way of saying there's a lot of unknowns. We feel really terrific about the limited release, taking the time to optimize the training protocol, to contemplate the needs of both the surgeons who have a strong understanding of robots, as well as those who don't.

And as we talked about at the analyst meeting, that all went really, really well. With the 50 or so surgeons trained, we feel great about going into full commercial release. I'm sure we will learn a lot at this year unfolds. Based in everything we are seeing and hearing, admittedly a lot of that's going to be anecdotal for now. We believe this is a game changer.

We would expect to continue to build on that momentum in 2018, and think this is going to be a multi-year rollout, and process of gaining market share as we not only continue to install new robots, but also the utilization of coming up on 400 globally, and the bulk of which are in the US, as those are all robots are upgraded to the total knee. This is much more than a 2017-2018 story. This will be a multi-year rollout.

Thank you. My follow-up is in terms of salesforce build. You've commented that you've been able to retain your spine sales force, but thinking across orthopedics, where are you in terms of net adds?

As it relates to MAKO, the adds are not so much in the salesforce, the adds are much more for the MAKOplasty specialists. We have this clinical person that's in the operating room, helping the surgeon really make sure they can do the procedure, and our sales reps will have more room to hunt. The adds that we've made, we've made obviously, our extremities business has been growing very robustly, and we've been adding in the extremities sales force.

Our sports medicine business has been strong double-digit growth. We've been adding reps in our sports medicine business. If you look at the areas of the business that are growing, they're growing strong double digits in a number of areas, those are the areas we continue to believe specialized sales forces drive growth.

Larry Biegelsen from Wells Fargo.

One neurovascular, one MAKO. Katherine, it looks like the SURPASS US trial was completed in December 2016. When are we going to see that data? When do you expect US approval? And can you remind us of the size of the US flow diverter market? And I had one follow-up.

The one-year data, I'll follow up on specifics, but you are probably looking at late this year, sometime at the beginning of 2018, and we are looking for a launch in the 2018 timeframe, probably the latter part.

Got it. On MAKO, Katherine, are you willing to share metrics over the next five years, what percent of your total knee volume you think MAKO will represent? What percent of the installed base do you think it will add the total knee application?

Lastly, what percent of MAKO total knee procedures do you expect to come from competitor surgeons? I know you've given a metric like 40% of new system sales are to competitor surgeons. Thanks for taking the questions.

I think we need to get into the full commercial release. Again, this is new territory for us. I think we've done everything we can to optimize our positioning ahead of the full commercial release. It would be a level of specificity and detail we just don't have.

We are really pleased that we have, as you mentioned, 40%-plus of the installs are into competitive accounts. I think that speaks to how appealing this process is for a variety of surgeons. And as we get into the full commercial release, we'll look and see what additional data makes sense. Candidly, five years out, all I know is that we're successful in the execution here, we will have captured meaningful market share. It's premature right now to put out specific targets as to where we expect to be.

Chris Pasquale from Guggenheim.

Kevin, now that you've anniversaried the tough emerging markets comps, and you start to see some growth again, how do you get back on offense there? I know you've said it won't be quick. Do you have what you need internally to get that piece of the business where it needs to be? Or do you need to think about supplementing that with local assets or expertise?

For us, our challenge has largely been more of a people challenge than a product challenge. We are very small, we're subscale, we haven't necessarily made the investments like other companies have made with bricks and mortar training. We are in the process of recruiting a new leader for China. I'm happy with our India business. It's been really performing well over the past few years, but we are starting from a small place.

Latin America has gone through a lot of challenges for us. We still have work to do. The same in Turkey.

For us, it's a question of, we are subscale. When you're subscale, attracting the best talent is really challenging. I would say for the next couple of years, our focus is much more on talent and making are we sure we do the right investments and training education. That type of offense.

We actually have very good products. In fact, I'm very excited about some of the products we're launching that are lower priced. We have a new power tool called System G which is getting great feedback, it's a very new launch. We've never done this before. A made for the emerging markets products. We have the low-priced bed that's made in Turkey at our Muka facility.

And then we have Trauson. We had a good start to Trauson, but I would say, with all the other challenges going on in China, that has been more challenging in the last year or two. It's really one of those stories where I think, unlike Europe, we could see that if we just put a bit of spending behind Europe, in specialization, we could turn that on very quickly. The business model is very similar to the experience in Canada, the US, Australia, other markets where we've been successful.

Emerging markets requires a different offense. I don't want to over invest and really have the money go up in flames. We are going to be a bit more measured, and the first step is to really make sure we have the right talents, which is frankly the key to our success in other markets. That will be our first focus.

That's helpful. Could you comment on the recent Lifepak recall and what impact that has on the Physio business? Is that a headwind for you? Could you actually benefit from it, to the extent it encourages customers to think about upgrading?

Yes. I would say right now, it's premature on that front. We do have a limited ship hold right now, it is on an older generation AED product and we're working through that. We don't expect to be a material issue and I would also note, it is not related to the competitor issues that are out there recently. So, we feel good about our pipeline of products, and our ability to manage through this recall.

Bruce Nudell from SunTrust.

Kevin, my first question, forgive my ignorance. What is the basis for product superiority of 3D printed products in cementless knees and revisions, and how does that potentially, over the long run, tie in with robots?

There are two main benefits. One is porosity, so you can really have a tremendously strong, so for titanium it's very strong but very porous, which enables the bone to grow into the implant. That's one. So porosity and geometry. Those would be the two.

I'm not an expert. My engineers probably have five other things that they would tell you, but those are the high-level hop-to things. The geometry, the shapes of our the 3D cones, you cannot make those shapes unless they are 3D printed, and they're beautiful for the surgeon to be able to drop in. It saves them a lot of time, fits the anatomy really well.

The porosity, that is the reason why we can do cementless knees, is the bone grows in beautifully. We had a claim from the FDA for our spine interbody device, that our device promotes bone in growth, unlike peak devices that obviously the bone does not grow into the device. It's porosity and it's geometry.

Perfect. When you think about -- it sounds like the MedSurg products, the core MedSurg products, are well configured for European demand. But could you contrast the size of the US core MedSurg market versus that in Europe, and your relative shares?

Just at a very high level. This is very high level. I would say our market shares in Europe is about half of the market shares that we enjoy in the United States. Just to give you round numbers, and that's in the MedSurg portfolio.

That's actually the area where we have the most upside, and those are the same competitors that we compete with, in the United States. We have a long way to go in power tools. A long way to go on cameras. A long way to go in beds, and I'm really excited about the potential. Our emergency power cots, we've done extremely well in Europe, but the rest of the MedSurg portfolio we have significant runway, given it's not like we're 5 share points below, we are about half our market shares in many of those products.

Matthew O'Brien from Piper Jaffrey.

Just to focus on gross margins for a little bit. Saw a pretty big step down after Sage and Physio. Q2 of last year, as you anniversary those, get more favorable mix, especially from neuro. Should we expect gross margins to start kicking higher in Q2, and throughout the course of the year?

Matt, if you remember from Analyst Day, we provided guidance around operating margin and top line. We're not really going to provide additional guidance around the details of gross margin. I will say that -- keep in mind -- as you think about mix of our businesses, if you think about MedSurg having slightly lower margins, and orthopedic having slightly higher margins, a lot of that gets made up in term of the SG&A mix, as that slows down to the operating margin line. I think that's probably all we will guide, relative to gross margin this year.

Okay. Moving over to the MedSurg side of the business and endoscopy, one of your competitors is readying to launch there with some new visualization technologies. I'm curious as far as how you feel about your position in the market from a technology perspective, and whether or not you need to upgrade some of your visualization capabilities? And if you'd be even interested in doing something externally to help you out there?

When you say upgrade, do want to be more specific please and what you mean?

Specifically philosophy and imaging there and your technologies, and if there's any improvement that you are expecting from new technologies over the next year or two, or if you look at external, to augment your capabilities?

We are not going to talk about the external areas that we're going to focus on. Also, we are not going to talk about product pipeline beyond what we've already indicated. We are really thrilled with our 1588 camera. It operates extremely well.

I'm not sure if you are referring to, for open surgery exoscopes. I am not sure what you are referring to, but I'll tell you, every division has identified their pathway and their pipeline for innovation. I'm not sure if you're talking about 3D. I'm not sure if you are talking about 4K or what specifically you are referring to.

What I tell you is the 1588 is only a year into its launch, and it is getting fantastic feedback, and I would expect that the endoscopy division will continue to have terrific growth with 1588. They are on the lookout constantly for improvements to the product portfolio, but we aren't going to talk about that until we end up consummating a deal.

Raj Denhoy from Jefferies.

I know it's late. Maybe two quick ones. Pricing, I think you gave us the metric for orthopedic pricing, and it did worsen a bit over the course of the year. I think it was 1.7% in the first quarter and now it's 2.5%. Is there anything to read into that? I'm guessing you will say no, but I thought I'd ask anyway.

No, I wouldn't read anything into that. We haven't seen any big change. It does move around quarter to quarter. 3 It depends on the timing of launches and selling days and normal quarterly and year-over-year variability. I wouldn't read anything into that.

Secondly, Sage and Physio-Control, I think you gave the growth rates there, 11.8% and 7.4%. Both doing quite well, and that's close to $1 billion in annual revenue that's about to move from your acquired into organic. Is there any reason to think that those businesses will slow in 2017? How do we think about the outlook there?

As we said, we expect them, I think Glenn in his prepared comments, as we anniversary those in the second quarter, they will be accretive to our organic growth rate. Obviously, we have a big base but those are sizable businesses. We continue to target double-digit growth for Sage, and the type of gains we've been seeing in Physio, as that part rolls out new products.

I would underscored Glenn's comments regarding the first quarter, and the seasonality shift that will skew the year-over-year comps for Physio. But that's really just a comparable basis. The underlying business, as you've seen in the three quarters we've owned it, looks terrific and we look forward to it becoming yet another driver of our organic growth.

I would like to add, this medical division of ours, to integrate those two deals of that size, and to deliver for the full year in the US almost 10% growth on the base business is really a terrific performance, to have that much business and still deliver that growth on the base business is really outstanding.

Amit Hazan from Citi.

This is [Lee Preston] on for Amit. Two quick ones. For hips and knees, are you modeling any negative impact in your 2017 guidance for bundled payments at this point?

We've talked about bundled payments for the last couple of years, and at no time have we ever said that bundled payments is going to be causing a problem to our growth. It's been around for five years on a commercial paying side, and with CJR, you've just seen we've come through a year where the entire market had CJR in effect, and the market's doing very well. The short answer is bundled payments is not a headwind for our hip and knee business. Not just for Stryker, but for the entire market.

Okay. Got it. On Neurotech and spine, the segment operating margin was up a good amount in 2016. To what attempt is that sustainable?

Neurotech and spine? I'm sorry.

We don't model out individual op margin by the division, neuro, those are high-margin businesses for us. But we don't model out or provide guidance for the specific segments. We give that total Company op margin 30 to 50 basis points target, and that's one of the contributors to that.

That's certainly, the Neurotech and spine business are profitable business, and they've been high-growth business, so certainly that mix has helped the Company.

Richard Newitter from Leerink Partners.

This is Ravi in for Rich. One on MAKO, and maybe one on the longer-term strategic view. In the nearer term for MAKO, I know everyone is talking about four to five years. Just curious, can MAKO upon ramp or the next 6 to 12 months, drive your growth rates up beyond this nice mid-single digit, high-single digit level you've come to into the double-digit territory? Should we think of it more as cannibalizing some of your non-robotic knees?

Secondly, just in terms of helping us gauge risk around manufacturing, it sounds like you are working on this 3D printing plant in Ireland. How do we factor in some of the comments that the administration is making around manufacturing in America, as it pertains to Stryker's production and where your products are made? Thanks.

I will start with the first question. I would say we continue to anticipate, as we launch the total knee, that it will help drive meaningful market share gains, starting as we exit 2017. We are not assuming any cannibalization. There will be those customers who continue to use Triathlon traditionally, and as you can see, there's been a strong demand as we continued to install and upgrade robots to the new knee application.

As it relates to the second question, we have a very global manufacturing environment, which includes significant manufacturing in the United States. We do have 3D printing machines here in the United States, as well as in Ireland. Obviously, we have decided to have a purpose-built building, where we are scaling up that manufacturing. We also make implants here in the United States, and most of our MedSurg products are made in the US. Compared to other big multinationals of our size, I think we actually are pretty well-positioned, regardless if they have some type of offset to their lower corporate tax rate. I think we will be in pretty good shape.

Maybe if I could squeeze one housekeeping question. I might've missed this earlier, some connection issue. What was the selling day in the quarter? Were there any extra or fewer selling days in 4Q?

Fourth quarter, there were no change in days. Same as the year before.

Jeff Johnson from Robert Baird.

Kevin, maybe I will go back to your comments on the US manufacturing. are there any numbers you can give us at this point on what percentage of your US revenue is generated by products manufactured in the US? It sounds like the answer is yes, but you have some flexibility. I would assume that you could move that around if you needed to, from a border tax standpoint?

Jeff, this is Glenn. Right now, there's a lot of ambiguity around details of the specific border tax. As you look at our manufacturing footprint, and we look at what we bring into the US to sell, that might be made outside the US. We are roughly around a 50/50 split in terms of the impact to us.

Got it. That's helpful. Kevin, maybe on guidance. Going back to the Analyst Day, 9% is the floor, is the floor, is the floor.

If I adjust for FX and deal accretion in the ASU adjustment bring your 2017 guidance, I'm closer to 7% to 9% EPS growth in your 2017 guidance. That's a lot of moving parts, I understand. Should I view this as a reason to assume your guidance is conservative here? Has anything changed since the analyst day? How should I think about that 7% to 9% versus 9% being the floor?

I think we can help you with that math off line. We are definitely not delivering a number below 9%. There's something in your math, that we can talk to you off-line.

Definitely, there is no change at all in our stance, and this guidance firmly reflects. There might be something in the deal accretion that you might have off in your model. We will be happy to take that off-line.

Kyle Rose from Canaccord Genuity.

I just had one quick question on the MAKO side. I appreciate not wanting to give significant long-term guidance. From a near-term perspective, I wanted to see if you could give any color related to the amount of robots that have been upgraded to the knee application to date? How should we think about it with the 50 trained surgeons?

Should we think about that as 50 sites or are there multiple surgeons at one site? Any insight there? 86 robots year to date, great year-over-year growth. When we think about 2017 and balancing the upgrades to the knee application as well as seeking out some of the new placement, can you continue to grow the new placements at the rate that we saw year-over-year 2016 versus 2015?

We are probably not going to get too specific in terms of outlook for robots installed. Obviously, we would look to continue to grow that. Keep in mind it is going to be balanced between that and upgrading existing robots, as we mentioned.

It will be both of those drivers, and we're not going to get into the level of detail around system upgrades and the like. It's probably getting down into the weeds a bit too much, particularly relative to the total size of the Company. We are really pleased with how the limited launch has gone.

That's not only the training, the training protocol, the outcome of the experiences the surgeons have had, as well as the training sites we've been able to bring on board. We are in a great position for Academy. We will have roughly 50 surgeons trained to have done a significant volume of surgeries, that they will be well-positioned to help start the training. And as we go through the year, we will continue to give you data points that we think are relevant, and we will look to see how the year unfolds. Expect more robots to be placed, but probably too soon to start talking about exactly how much bigger your year-over-year given the new dynamic of upgrades.

What I would say is I'm delighted with the MAKO capital sales force. They've done a terrific job selling these robots, and in the fourth quarter doing upgrades. And every quarter, we will continue to tell you how many robots we've sold.

Great. Thank you very much.

Kristen Stewart from Deutsche Bank.

Thanks for taking the follow-up. It just wanted to ask one housekeeping. The $250 million that you had mentioned you are going to be doing going forward, in the stock repurchases, is that included in the guidance, or is that something that you would continue to do on a one-off basis?

Kristen, it's Glenn. Yes, that is included in the guidance.

Okay. Perfect. Just one other thing. Anything we should look at beyond AA West this year, in terms of either procedures or any other clinical meetings that may come up in terms of the Neurotech business, or endoscopy, or anything else?

Yes. We will have a presence at a number of meetings. As you'll recall, in 2016 we had a presence at SAGES and NASS and the like. When we get to Academy, we will switch gears and start thinking about some of the additional meetings and what segments will be highlighted.

Kristen, we are starting to show up in a lot of these specialty society meetings more and more. You talked about the extremities society. There's a whole series of those societies, that we are showing up in, sports medicine meetings. These smaller societies where we have very, very fast growth, neurovascular society meetings, those tend to be a lot more impactful frankly, than the large, the large ACS type of meetings. We really -- our specialized business units, specialized sales forces are more and more going to specialized conferences, something like SAGES for our endoscopy division. We're starting to see a shift where these society meetings, these specialized ones, are much more impactful, better use of our time and money, and we get great insight and new technologies. We get to show surgeons our innovations. That's going to continue to be an engine of growth for us.

Thank you. There are no further questions at this time. I will now turn the call back over to Mr. Kevin Lobo for closing remarks.

Thank you all for joining our call. Our conference call for the first-quarter 2017 results will be held on April 25. Thank you.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.