史賽克 (SYK) 2017 Q4 法說會逐字稿

Welcome to the Fourth Quarter 2017 Stryker Earnings Call. My name is Sondra, 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 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, Chairman and Chief Executive Officer. You may proceed, sir.

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 will 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.

2017 was another strong year for Stryker, including an impressive Q4 organic sales growth of 8.1%. And we again faced tough year-over-year comparisons in Q4 across all 3 groups: Orthopaedics, MedSurg and Neurotechnology and Spine, underscoring the strength of our diversified revenue model. Growth was also balanced geographically with the U.S. posting organic gains of 8.6%, while OUS was up 6.7%. Within international, growth was consistent across regions, and Europe posted high single-digit gains for the third consecutive year since we implemented the Transatlantic Operating Model. There were numerous standout, above-market performances in the quarter, which Glenn will cover in his section.

For the full year, despite Sage product supply issues, 3 major hurricanes and 1 less selling day, organic sales growth topped 7%, exceeding our raised guidance of 6.5% to 7%. Both our Q4 and full year results reflect excellent sales and marketing execution, coupled with value-added innovation delivered by R&D and acquisitions. And through the tremendous effort of our Global Quality and Operations team, we ensured continued product supply following the hurricanes as well as meeting our targets to return Sage products to the market.

We continue to make strong progress with our cost transformation for growth initiatives, which are yielding tangible results that will sustain ongoing operating margin expansion. Adjusted per share earnings climbed 10.1% to $1.96 for Q4 and were up nearly 12% to $6.49 for the full year, topping our targeted range of $6.35 to $6.45 established at the start of 2017.

As we look ahead to 2018, we expect our top line momentum to continue and target organic sales growth of 6% to 6.5% for the full year, which we believe will once again be at the high end of med tech. Our outlook reflects robust product cycles across our divisions, continued strong sales and marketing execution and the benefit from acquisitions that have passed the 1-year mark. The recent U.S. tax reform legislation and acquisition dilution will create headwinds for us in 2018. But with our strong top line and operating margin expansion, we are targeting full year adjusted per share earnings of $7.07 to $7.17.

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

Thanks, Kevin. My comments today will focus on Mako. As noted in our pre-release earlier this month, momentum continued with Q4 Mako robot installations totaling 35 globally with 27 in the U.S. And in Q4, we had our first robot sale in Japan with approval for the Total Knee application expected by year-end. We are also pleased that upgrades of existing robots in the field to the Total Knee application are pacing ahead of plan. Upgrades of our existing customers was a big focus in Q4, which does take considerable time from our capital sales force to close. We expect continued new robot installations as well as completing upgrades of the majority of robots in the U.S. during 2018. Since launch of the Total Knee application, we have trained over 800 surgeons, including roughly 200 in the fourth quarter.

Mako Total Knee procedures for 2017 were 15,778, of which nearly 20% were with competitive surgeons who are using our Triathlon Total Knee implant for the first time. We continued to see approximately 40% of our robots installed in competitive accounts, where we have well below average or no market share. We are clearly seeing the pull-through effect from accounts with Mako as our U.S. primary Knee sales and Mako Total Knee accounts grew at 5x the rate of accounts without the Mako Total Knee application.

For all Mako applications, procedures in 2017 topped 42,500 versus 22,000 the prior year with all 3 applications growing. Mako utilization rates also continued to climb, increasing over 40% year-over-year in the fourth quarter for all Mako procedures and up roughly 30% sequentially, fueled by Total Knees. We exited the year with Mako robots in 372 U.S. hospitals, which represents about 10% of our customer base. We remain very encouraged by the strong customer feedback, which we anticipate will be evident at the upcoming AAOS meeting in March and subsequent surgeon meetings throughout the year. During 2017, we sold robots into a number of top-tier academic hospitals, where many of the industry key opinion leaders are championing the technology. This is enabling competitive conversions driven by surgeons focused on improved clinical outcomes achievable with the Mako Total Knee.

Looking ahead to 2018, we believe we are well positioned to continue to drive Mako momentum, including double-digit year-over-year growth in new robot installations, completion of the upgrades of existing robots in the U.S., expansion OUS and further evidence of the improved clinical outcomes with the Mako Total Knee at both AAOS and later in 2017 (sic) [2018] at ACS.

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

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

Our organic sales growth was 8.1% in the quarter included no difference in selling days. This resulted in full year organic growth of 7.1%, which is slightly above the high end of our target growth range of 6.5% to 7%. Pricing in the quarter was unfavorable 1% from the prior year, while foreign currency exchange had a 1.2% favorable impact on sales.

For the quarter, U.S. sales continued to demonstrate strong momentum with organic growth of 8.6%, reflecting solid performances across our portfolio. International sales grew 6.7% organically, which was balanced across our international regions.

Our adjusted quarterly EPS of $1.96 increased 10.1% from the prior year quarter, reflecting strong sales growth and good operating expense control. Foreign currency, including the impact of our hedging program, had a nominal positive impact on fourth quarter EPS.

Focusing on our segment highlights for the quarter. Orthopaedics delivered constant currency and organic growth of 6.8%, led by the U.S. with organic growth of 8.1%. These gains reflect continued momentum in the U.S. Trauma and Extremities at 11.5% and Knees at 10.5%. Underlying this growth was strong demand for our 3D-printed products, our Foot & Ankle portfolio and our Mako platform. Orthopaedics international delivered constant currency and organic growth of 4.1%, led by our European businesses, partially offset by our performance in Asia.

MedSurg posted strong gains across all businesses in the quarter with constant currency growth of 9.8% and organic growth of 8.5%, which included a 9.3% increase in the U.S. Instruments grew U.S. sales 13.5% organically, including robust growth from our power tools and Steri-Shield products. Endoscopy delivered U.S. organic growth of 8.3%, underscoring the strength of this product portfolio, which includes the highly successful 1588 AIM camera platform as well as its ProCare service support and sports medicine businesses. Medical and U.S. -- medical had U.S. organic growth of 6.3% despite a $30 million loss in Sage product sales. This growth was driven by its core bed and power cot products as well as strong accretive growth from Medical's Physio business. During the quarter, medical Sage business returned to market with all of its product families. We are seeing a positive response from our customers and remain focused on regaining lost market share as we move through 2018. Internationally, MedSurg had constant currency growth of 6.7% and organic sales growth of 5.7%, which reflect solid performances in Europe and Australia.

Neurotechnology and Spine had constant currency growth of 10.3% and organic growth of 10%. This growth reflects continued strong demand for our neurotech products. U.S. neurotech posted organic growth of 12.9% in the quarter, highlighted by continued strong demand for our neurovascular products, including our Target Coil and AIS products, as well as our CMF products in our Neuro Powered Instruments. Our Spine business in the U.S. posted positive growth, bolstered by continued demand for our IVS and 3D-printed interbody titanium products. The core spinal market continues to be challenged and has softened throughout 2017. Internationally, Neurotechnology and Spine had constant currency growth of 15.6% and organic growth of 14.5%. This performance was driven by continued strong demand for our neurotech products in Europe and Asia.

Now I will focus on operating highlights in the fourth quarter. Our adjusted gross margin of 66.4% was in line with the prior year quarter. Gross margin was negatively impacted by absorption and productivity issues associated with the continued recovery of our Puerto Rico manufacturing facility as well as unfavorable pricing and mix, including the impact of acquisitions. During the quarter, we continued to invest in our internal innovation with R&D spending totaling 5.9% of sales and full year totaling 6.3%.

Our SG&A of 33.5% of sales was 90 basis points unfavorable to the prior year quarter. This reflects unfavorable leverage from our recent acquisition; business mix, including the impact related to our recent NOVADAQ acquisition; and sales losses resulting from Sage product actions. Additionally, we have continued to make investments in our ongoing ERP initiative and certain sales growth initiatives, primarily Mako TKA, which were partially offset by favorable leverage from continued focus on operating expense improvements through our CTG program and other cost-containment efforts. In total, adjusted operating expenses were 39.4% of sales in the quarter, which was 80 basis points unfavorable to the prior year quarter.

In summary, our adjusted operating margin was 27% of sales, down 70 basis points from the prior year quarter. Our full year operating margin was down 30 basis points from the prior year. Adjusting full year operating margin for issues related to Puerto Rico and Sage and excluding dilution from NOVADAQ, our operating margin delivered over 30 basis points of improvement.

Lastly, I will provide some highlights on other income and expense. Other expenses decreased from prior year quarter due primarily to reduced net interest expense and increased investment income. Our fourth quarter adjusted effective tax rate of 16.1% reflects the benefits from our global tax structure, partially offset by the impact of higher U.S.-based income from our recent acquisitions.

On December 22, 2017, the Tax Cut and Job Act was signed into law by the President, which provided for multiple changes in the current tax regulations. Most noticeably, it included a reduction in U.S. federal corporate income tax rate, a current tax on previously deferred foreign earnings and profits and an ongoing tax related to certain returns related to assets held in controlled foreign corporations. Related to these changes, we recorded an unfavorable adjustment to our U.S. deferred tax assets of $38 million, reflecting the impact of the federal income tax rate change on our net deferred tax assets as of December 31, 2017. Additionally, a liability of approximately $785 million was recorded related to future tax payments on previously deferred foreign earnings and profits. Both of these adjustments have been reflected in our reconciliation of non-GAAP earnings.

Moving on to the balance sheet. We continued to maintain a strong balance sheet with $2.8 billion of cash and marketable securities, of which approximately 62% was held outside of the U.S. Total debt on the balance sheet at the end of the year was $7.2 billion.

Turning to cash flow. Our full year cash from operations was approximately $1.6 billion.

During 2017, we repurchased approximately 230 million of shares.

And now I will provide our 2018 guidance. Based on our momentum from 2017 and assessment of the current economic and market conditions, we expect organic sales growth to be in the range of 6% to 6.5% for 2018. There are the same number of selling days in 2018 as in 2017. However, as you update your quarterly models, please note that Q1 has 1 less selling day, Q2 has 1 more selling day, and while both Q3 and Q4 have the same number of days. If foreign currency exchange rates hold near current levels, we anticipate sales will be favorably impacted by approximately 1% in 2018. We also expect continued unfavorable price reductions of 1% to 1.5%, fairly consistent with the pricing environment experienced in 2017.

In addition, we expect our CTG program and other cost-containment measures to add 30 to 50 basis points of operating margin in 2018. We also anticipate that investment spending on CTG programs and ERP will continue to be at the same levels as 2017. As the new tax act relates to our 2018 effective tax rate, we anticipate that it will be a modest increase. The modifications to the Internal Revenue Code include a much lower base U.S. federal corporate tax rate and a move to a more territorial system for corporations that have overseas earnings. However, certain provisions relates to the taxation of income streams from foreign subsidiaries are expected to have a negative impact on our effective tax rate, more than offsetting the benefit related to U.S. rate reduction. As such, we expect our full year adjusted effective tax rate in 2018 will be in the range of 16.5% to 17.5%.

Capital expenditures are expected to be $550 million to $600 million in 2018 as we continue to invest in our operations and IT infrastructure, including year 2 of our worldwide ERP implementation, to support future growth and operational efficiencies. This level compares to approximately $600 million of capital expenditures in 2017.

At this time, we anticipate share buybacks of $300 million to essentially offset dilution in 2018. If foreign currency exchange rates remain at current levels and when considered along with our hedging program, we expect modest favorability in net earnings per diluted share for the full year and first quarter.

Finally, for 2018, we expect adjusted net earnings per diluted share to be in the range of $7.07 to $7.17 for the full year, including approximately $1.57 to $1.62 in the first quarter. Our guidance includes the aforementioned impact from the new tax act and foreign exchange as well as previously announced acquisition dilution, including Entellus, which is expected to close in Q1, with full year dilution estimated to be $0.04.

And now I will open up the call for Q&A.

(Operator Instructions) Your first question comes from the line of David Lewis with Morgan Stanley.

Just a few questions. Kevin, I want to start with Knee performance. If we think about Stryker Knee momentum in the fourth quarter, it's perhaps the widest it's ever been relative to peers. So why don't you talk about some of the primary factors? I know you've discussed Mako as a component, cementless as a component and competitive disruption. But how do you see the mix of those factors in the fourth quarter? And how should investors think about that momentum into 2018 and the factors driving that momentum in 2018? And I have a few follow-ups.

Sure. Thanks, David. We were obviously delighted with our Knee performance. Mako, in general, was a terrific performance for the year, both in capital as well as upgrades. Getting the Total Knees upgraded was a big factor. I would say that Mako was the biggest contributor to our outperformance. Cementless, of course, continues to grow. We exited 2017 with 24% of our knees done cementless, pretty significant number. We're only able to start promoting cementless with Mako in the fourth quarter. But clearly, some surgeons were able to do that even prior to the official approval. Those are the 2 biggest factors. Clearly, there are -- there is some competitive disruption that's occurring. But the degree of separation, you heard Katherine talk about the number of surgeons trained, the momentum, the procedural growth with Mako. We're now in this mode where Mako is the biggest contributor to the growth. We're very excited and bullish about the prospects for the future. And you recall a few years ago, we said that after we do the full launch of the Total Knee, we expected to gain hundreds of basis points of market share. And clearly, this is only 1 quarter, but it's a terrific quarter.

Okay, very clear. And then, Glenn, just kind of a 2-part question for you. One, I just -- can you help us a little bit with the earnings bridge for 2018? Specifically, components I'm interested in are FX, NOVADAQ, Sage, and then you gave us Entellus, but FX, NOVADAQ and Sage. And then sort of related to that, if I think about the fourth quarter, you typically see about 250 basis points of margin improvement into the fourth quarter if I adjust the third quarter for those onetime events. You've had about 200 basis points into the fourth quarter. So just wondering if there's anything from a margin perspective or spending that was unique to the fourth quarter that carries on into 2018?

Yes, yes. Sure, David. I think, first of all, in terms of -- as you think about sort of earnings bridge from 2017 to 2018, you're right. There probably are a number of tailwinds and some headwinds that certainly go away. I think in any 1 given year, as we look at 2018, we do have some positives. And those would include FX. Those would include recovering Sage. It would include Mako performance, where we are on product cycles. We also have some challenges, especially around the spine market, and changes in the tax law that go the other way. I think the other thing we need to consider is that, at the beginning of the year here, there's probably things that we don't even have visibility to that will certainly impact us during the year. And we learned that lesson in 2017, for sure. So as I think about our guidance for 2018 and at this point where we are in the year, we're targeting, first of all, sales growth that is at the highest level we have ever targeted at the beginning of any year. And we've also targeted an EPS range that brackets sort of at the low end, 9%, and at the high end, in excess of 10.4%. And I think that more than supports the commitments that we have to delivering sales growth at the high end of med tech and leverage earning gains. Certainly, as the year unfolds, we'll continue to assess the targets, but we have a high degree of conviction in our ability to deliver on the commitments that we've laid out.

And your next question comes from the line of Mike Weinstein with JPMorgan.

Let me just circle in on the margins. So first off, the fourth quarter. I just want to make sure I understood your commentary. So if you -- you reported 70 basis point contraction relative to the kind of The Street. But what you're saying is that if you backed out Puerto Rico impact and the Sage impact and exclude the NOVADAQ dilution, your operating margin would have been up 30 basis points year-over-year. That's question one. And then question two, I want to make sure I understood the 30 to 50 basis point commentary on margin improvement for 2018.

Sure. Your understanding is exactly correct. If I remove the onetime expenses related to the Puerto Rico manufacturing facility that hit within margin, if I also adjust for the loss of Sage sales, and then lastly, if I remove the dilution that came from NOVADAQ, we would have delivered 30 basis points of op margin improvement. And then as it relates to the 30 to 50 basis points guidance that we're providing for 2018, I feel like -- as I think about that guidance, I feel very strong and very committed that we will deliver within that range, the 30 to 50 basis points and maybe to the -- at least to the midpoint of it.

Okay. And that's a 30 to 50 basis points, including the headwinds of Entellus and NOVADAQ margin dilution?

Correct.

Yes.

Okay. That's really helpful. And then one last question for you. So on a competitor call this morning, they basically said, "Look, fourth quarter was really strong, which we've seen from multiple players." Obviously, you guys had a fantastic fourth quarter. Are you assuming that the first quarter, just because the fourth quarter was so strong, that the first quarter just naturally is going to be a little bit weaker? And are you seeing that? And also, are you seeing the impact from the U.K. that they talked about this morning? And then I'll let others jump in.

Yes. Thanks, Mike. A couple of comments. Clearly, the fourth quarter was a strong quarter. And if we look at our recon business, we're obviously really pleased, but it was really about share gains. And we grew, based on what we know, from who's reported over 3x the rate of the overall market. When we look at the market, it grew around 3%, and that looks very comparable. Again, I'm talking about U.S. recon growth that are very comparable to the year-ago quarter. So we didn't see any excess seasonality in the fourth quarter. What we did see is the real beginnings of a departure in our market share gains and greater share shift, and that's really the focus. Q1, we have 1 less selling day. So I would note that we have 1 extra selling day in the second quarter, so no change for the full year. The U.K. had started to put some restrictions on electric procedures due to flu. I would put that in the incremental headwind. But does it materially change our view on seasonality? No. Q4 is seasonally the strongest. Q1 is seasonally the weakest, but that's not anything we expect to be different from prior years. And again, the focus we have is really much more on market share gains. Because if we can grow 3, 3.5x the market, it obviously has a much bigger impact for us than 10s of basis point swings to the positive or negative from either hurricanes or U.K. procedural slowdown. So nothing that we're seeing that's different, either for the fourth quarter or expectations beyond what I said for the first quarter.

And your next question comes from the line of Bob Hopkins with Bank of America.

Congrats on all the success with Mako. I wanted to start there, if okay. I apologize if I missed this. And I know at the end of the third quarter call, you said you did roughly 4,500 procedures with Mako, and I know you gave an annual number. But can you give us a sense for what the Q4 procedure number was for Mako relative to that 4,500 in Q3? And then also maybe highlight what kind of -- what data we should expect at AAOS?

Yes. Bob, I'll follow up with you offline. I don't have the quarterly breakdown in front of me at the moment. And some of it -- keep in mind, the 42,500, that was for all Mako procedures in 2017, and that compared to the 22,000 the prior year. But offline, I can give you the quarterly breakdown for the procedures for Knees and the Total volume. Clearly, at academy, it will be a big focus again will be on Mako, what we're seeing in terms of physician feedback. I think you're going to start to see more of the clinical data as we get closer to the back half of the year as some of the key opinion leaders and their early clinical trials that they were doing, we start to get more of that data. So I think ACS will be bigger with respect to clinical data, but I would imagine that we're going to have some papers and posters available. We did touch on this on the third quarter call. So expect some of it at AAOS. And again, obviously longer randomized clinical data will take longer, but you're going to start to see that materialize throughout 2018.

Okay, great. And then one for Glenn. Glenn, 2 quick things. One, can you just give us an update on both Sage and Physio and kind of where we are right now given the issues that you had in 2017? And also, I was just wondering if you could quantify the EPS headwinds that are sort of onetime in nature in 2018. I know you talked about Entellus. But just -- if you could quantify the other kind of onetime EPS headwinds in 2018, that would be much appreciated.

Sure. As it relates to Sage and Physio, as I mentioned in my script, over the course of Q4, we were able to go back to market with all major product families for them. So that was a big win, and we continue to see some ramping. I will also say that, in Q4, the sales loss of $30 million was less than the sales loss we were anticipating. So that was a good sign, too. I still anticipate a fair amount of ramping and work to do in 2018. In terms of Physio, Physio finished very strong in Q4. In fact, their growth was accretive to the overall medical business. So we were very pleased with where Physio finished up the year. And then lastly, on EPS, I did list out sort of what some of those headwinds were and what we expected essentially, the spine market. I also talked about acquisitions that we have. Entellus, we did quantify at $0.04. I think NOVADAQ, we obviously said would be nominal, so there wouldn't be a really big impact on NOVADAQ. And then we didn't quantify any others.

And Bob, the Total Knee procedures in the fourth quarter on Mako was about 7,000.

And our next question comes from the line of Chris Pasquale with Guggenheim.

Just to circle back on medical and the strong performance there. Can you quantify at all how much Physio might have benefited from some of the competitor issues that you talked about that being very strong to finish out the year? And I would guess that, that contributed to that strength.

Yes. It's difficult to pull an exact number. But clearly, some of the competitive challenges did help our business overall, where we've also launched some new products outside the U.S. that's contributing to the momentum. And it's been part of Stryker for well over a year now. So we've really integrated that organization and feel really good about the ability for them to drive the type of sale synergy that we had really expected at the time of the acquisition. So no doubt there's a benefit, but it's certainly not the only factor contributing to the strong performance.

Okay. And then how are you thinking about the Spine business in 2018? You talked about some of the market challenges there. Does that get better at some point? Or are you thinking about portfolio additions that could help differentiate your bag from competitors?

So it's clear the market remains challenged when you look at the traditional spinal hardware business. Our IVS business, we're seeing good growth. But the spine market overall, the conditions remain difficult. And I think we're just going to have to be cautious and conservative around our expectation for 2018 because the whole market is seeing some of these difficulties. So we're going to continue to invest there, and we're committed to the spine market. We've got a great organization there. Fortunately, we're a big enough company that we can manage through some of these challenges and still make the necessary investments. But in terms of predicting a market rebound here or improvement, it's just too challenging right now to have any certainty around that. So until we see evidence to the contrary, we're going to assume this year remains challenged.

And our next question comes from the line of Rick Wise with Stifel.

Maybe start off with a couple of Mako questions. I mean, obviously you've got the TKA approval. How do we think about the potential opportunities? Should we be dialing in Japan as an incremental Mako opportunity? How do we think about the next couple of years?

So I think for 2018, the focus for our organization right now is completing the upgrades of the majority of the systems that are in the field in the U.S. And there's a lot of work that's gone into that, and that should be done this year. That will allow the organization to shift focus strictly to new installations. And as I mentioned, we expect double-digit growth there. We did sell the first robot into Japan, but we're not expecting the Total Knee application until later this year. So I would really look at that opportunity as after 2018. We've got a lot of runway in front of us. We've penetrated about 10% of our customer base, and we expect the momentum only to continue to grow as we get into competitive accounts, as we continue to gain more clinical data, more clinician support. Getting into these academic centers is obviously a big win because it underscores the clinical value here. So we're going to keep with the game plan that's been working well and continue to execute on the Mako application. And I think you should view Japan as something that's a longer-term opportunity, an important one, but probably not significant with respect to the revenue contribution for 2018.

And Kevin, just thinking about M&A. You did one deal. You're still adjusting NOVADAQ. You've got work to do. Are you still open on the M&A front? Do you sense there's opportunities still? What -- how are you thinking about capital deployment in '18?

Yes. Thanks, Rick. There's really no change to our capital allocation strategy, so acquisitions continue to be our preferred use of cash. The beauty of our decentralized business model is you can have a NOVADAQ going on within Endoscopy, and then you can also have an Entellus going on within Instruments. So we have multiple divisions, have their own business development teams that are constantly scouring the market for deals. We have a very good deal pipeline. And that continues to be strong, and that will be our favored use. And so I would say we're continuing to be very open for business on deals that are going to be value creating, and we continue to turn down most of the deals that we look at. And that's not new. So this offense that we've had in place now for 6, 7 years, we expect to continue going forward.

And your next question comes from the line of Kristen Stewart with Deutsche Bank.

One for Glenn and then one for Kevin. Glenn, just in terms of the liabilities, just thinking about those related to Hips and then also now tax. How should one think about the timing of cash outflows over the next couple of years?

Yes. Kristen, the guidance is still forthcoming on exactly -- especially the big liability, which is the tax on accumulated earnings and profits, which is the $800 million liability that we booked. Right now, the guidance says that, that's payable over 8 years. So we expect that to spread fairly evenly over the 8 years, but we really won't see the liability decline or won't have definitive guidance until probably the latter half of this year.

Okay. And then what about for the hip liability on Rejuvenate? And maybe...

You know what, we settled Phase II this year, and you'd see that in our cash flow. And as I think about the liability, it's generally winding down. And I think you'll see that in our 10-K disclosures.

Okay. So the cash outflow on that should be winding out?

Yes. It will mirror the liability that's remaining. That's what we anticipate.

Okay. And then Kevin, how should we just think about -- to the extent that the organic growth guidance proves to be a little bit on the conservative side as it has been for the last couple of years, would you be inclined to reinvest some of the upside back into the business or let it flow through to the bottom line?

Kristen, as you've seen in prior years, we've revised upward both our sales and EPS. And in 2017, that was despite facing a lot of challenges, we still did raise our EPS. You should look at 2018 no differently. So to the degree that top line does come in stronger than we're currently targeting, you should expect that it would translate to incremental leverage at the bottom line. Now we may look to make some investments based on opportunities. But clearly, we've shown that we will let the net leverage flow to the bottom line, and that would be our expectation again this year.

And your next question comes from the line of Bruce Nudell with SunTrust.

Katherine, could you just clarify the number of TKA -- Mako TKAs year-to-date? And maybe comment a little bit about the U.S., ex U.S. split, as well as whether there's any ASP upside with the accouterments of the Mako system on a per-case basis?

Okay. So there -- in terms of the total Mako knee procedures for last year, it was just under 16,000. So 15,778 to be exact and about -- just a tad over 7,000 in the fourth quarter. That's all-in-all procedures -- all Total Knee procedures. There's some modest incremental costs associated with Mako but nothing I would call out as being meaningful.

Okay. And then...

Bruce, were you asking -- just -- I want to be clear, Bruce. Were you asking about how many robots are equipped?

No, no. I was asking more the sleeve that protects the arm and the instruments, that sort of stuff.

Yes. Obviously, there are disposables that come with it. We do sell those at a pretty modest cost, and they're not high-margin products.

Okay, great. And then, Kevin, just to follow up. Because they're not anniversary-ed yet, could you give us a feel for the kind of intrinsic growth rates of the NOVADAQ and Entellus franchises?

So if we look at both of those, we expect -- if you take NOVADAQ first, we have fully integrated that. We did a lot of that heavy lifting in the fourth quarter of '17, so we're well positioned now for NOVADAQ. We've got the sales force fully aligned. The teams are fully integrated. We've got aligned incentives, so that's really important in terms of making sure we don't have any internal competition or competing priorities. So they're well positioned at the start of this year to go after business and drive sales synergies, and we expect it to be accretive to our overall revenue growth. We haven't put out targets for NOVADAQ. But certainly, we expect, in the hands of Endo and with our combined sales force that, that would be accretive to our overall sales growth. And a similar expectation for Entellus, we have an ENT presence. We had some product gaps in the portfolio. We get a well-established sales force. And that would certainly, as we start to drive synergies in that and integrate it -- we need to close it first. But after we do that, a similar story to NOVADAQ. It should absolutely be accretive to our overall revenue growth, and we'll be able to give some color commentary as we get further into that integration post closing.

Right. And obviously, both were separately traded public traded companies. And you could see their results when they were reporting them before our acquisition, growing north of 15% quarter after quarter. And we would expect that we'd continue to fuel their growth and then also be able to pull through additional revenue through Stryker. And as Katherine said, she -- throughout the course of 2018, we'll provide updates. I'm very pleased with the initial integration of NOVADAQ, and certainly getting the sales force all lined up early in 2018 is probably one of the fastest integrations we've had since I've been at Stryker. So I really look forward to a good year in Endoscopy in 2018.

And our next question comes from the line of Raj Denhoy with Jefferies.

Wonder if I could ask a bit about the cementless knee trajectory, so you noted 24% in the quarter. So 2 questions on that. One, what sort of price premium are you getting on cementless at this point? And where do you think that penetration can top out for you over time?

So as Kevin mentioned, we exited the year at 24% penetration, and it's obviously been ramping nicely. Keep in mind, though, we did a very methodical slow launch initially. This was a paradigm shift resurgence, and we really wanted to make sure that they were seeing the results that would allow us to drive the type of uptake we're seeing now. But at 24%, it's clearly resonating well with our surgeon base. It's tough to know how high it's going to go. We're just going to have to wait and see. It's different than doing a hip. There was more concern initially. Clearly, getting the approval to do the Mako with the cementless knee is a big plus because the greater the precision of the cuts, the greater that press fit ability, so it's a plus. I would tell you we absolutely expect it to continue to ramp up and greater penetration throughout 2018, so we don't think we have topped this out. We do get a premium, probably roughly 10% for that product offering.

Okay. And just to -- as follow-up. You mentioned the Mako -- sort of the penetration of this in Mako. What percentage of Mako procedures are using cementless at this point?

Oh, it's pretty small. So there were some surgeons who were doing it prior to us getting the approval, but that was off-label, and it was absolutely the minority and certainly nothing that we were promoting. We only just got the indication in the fourth quarter, so the vast, vast majority of the cementless needs that have been implanted have been done the traditional open surgery approach.

And we do believe the combination of robotics and 3D printing is really powerful because bone prep -- having a precise, robotic-assisted cut is really going to help enable that press fit, just to emphasize Katherine's point. The 2 together, we think are very synergistic. And we do expect the cementless portion of Mako procedures to increase pretty dramatically.

And our next question comes from the line of Matthew O'Brien with Piper Jaffray.

I guess Kevin or Katherine, just thinking about the share gains in Knees specifically. You mentioned what you're doing versus the market. But how do you think about keeping that share, not necessarily in '18 here. It seems like you got some pretty good runway. But heading into '19 and beyond, is it the Mako angle that will help you keep share, something else on the traditional side that will allow you to keep share? Just how do we think about you continuing this divergence away from the market as far as share gains go?

So I think the runway for Mako and the Total Knee application, really, it goes far beyond 2018. So I think you'll hear a very similar focus from us as we go into 2019. As we noted, we've only penetrated about 10% of our customer base. We've just started to gather the clinical data that we think will really help drive future waves of adoption, and so there's a lot of runaway. We would call this a multiyear story. We're very excited about 3D printing, our dedicated facility in Ireland, what we've been able to do in recent years with that product offering in knees and spine. And so 3D printing is going to absolutely remain a big part of the story for our reconstructive growth and for Stryker more broadly.

Okay. And then, Kevin, I ask you about this every single quarter. But looking at the Trauma and Extremities performance, it's the best that you've seen in the last 13 quarters. That business is now getting to be -- it's bigger than Hips. It's getting to be as big as Knees. Can you talk a little bit about the acceleration there? And then by my math, your 17%, 18% market share in Trauma and Extremities, where can that go over the next several years? Can you be 1/3 of this market?

Thanks for the question. We're delighted with the performance of our Trauma and Extremities business. And as you know, this has not been a 1-quarter story. This has been about a 4-, 5-year story once we really filled out our product offering. Foot & Ankle has, of course, been a real engine of growth, where we're growing significantly above the market in that subsegment. We're starting to grow in upper extremities, so our shoulder business had a very good year in 2017. It's still a very small market share from a small base. We're growing very well. That still has significant room for us to grow. We now have a primary shoulder. We have a reverse shoulder. We have a fracture system, but we still don't have a full offering, be it a short stem or stemless. But we have the core offering to really start to grow within shoulder. That's certainly part of the story. Converting full accounts has been really an engine of growth the last couple of years. So 4, 5 years ago, we were making headway in Foot & Ankle and a few other areas, but now we have the full offering and can convert entire accounts. So we're delighted with our focus on dedicated sales reps, dedicated management, dedicated marketing, dedicated business development, R&D. That business unit dedication is clearly working, and we expect it to continue. Can we continue to grow at such a divergence from the market? I'm not sure but do expect to continue to outpace the market.

And our next question comes from the line of Glenn Novarro with RBC Capital Markets.

Kevin, wanted to -- quick question on your revenue guidance for 2018. You're guiding to 6% to 6.5%, and I know it's a very strong guide. But in 2017, you put up 7% growth. And I know some businesses have tough comps, but there's an easier comp with Sage. There's going to be an easier comp created by Puerto Rico and the hurricanes. So is there anything that you want to call out that's worrying you for 2018? Or are you feeling, at this point of the year, it's just better to be conservative? And then I had a question on international Knees and Hips.

So look, it is early in the year. We do have big comps in a number of areas. I think when you look at our product cycles, we have a number of product cycles that are really starting to accelerate. And then you have something like 1588, which is not really -- it's sort of in the later stages of its cycle. So there isn't anything really big that I would call out. I think growing north of 6% on over $12 billion of revenue is a pretty good guide but no specific worries or causes for concern. And if we continue with the kind of momentum we have, certainly we'd look to update our guidance at some point in the year. But every year starts out, and there's things that are going to happen that you don't know. And we feel this is a very appropriate guide. But the reason for narrowing the guide a little bit, in past years, we've had a wider guide on sales. I really feel good about the balance that we have across our divisions and the balance across our geographies. It's probably the most balanced position we've been in since I've been at Stryker. And so that causes us to feel a lot more confident, certainly on the lower end of the range than we have in the past.

Okay. And then let me just follow up with the performance of international Knees and Hips. It lagged U.S. And I know you called out Europe for a good performance. But one of your competitors talked about pricing pressure in India, pricing pressure in China, China reducing inventory levels. Did you guys see that in the fourth quarter? And if so, when does it resolve?

Sure. We definitely saw the same issues. India is, of course, a dramatic knee cut -- price cut of around 70%, which is government mandated. So everybody felt that. Fortunately for Stryker, we have a pretty small market share in India. So while it did hurt us, it probably didn't hurt us to the same degree that it hurt others. China is a bit of a different story, where you're moving to the two-invoice policy and there are regional tendering going on. It's not quite as dramatic an impact as it is in India. And we are very encouraged about our China business. We have a new leader that we put in place in China in Q4. He's strengthening the team, feeling very good about our prospects in China.

And your next question comes from the line of Larry Biegelsen with Wells Fargo.

One on Neurotech, one on Robotics. Surprisingly, no questions yet on Neurotech, which I think was your fastest growing business in the fourth quarter. So Kevin, maybe you can talk a little bit about what drove that. How much ischemic stroke is contributing to that? And the outlook there given all the positive data we've just recently seen, any updated guidelines? And I had one follow-up.

Yes. No. We're really excited. Our Neurovascular business has performed extremely well the past 4 years, and ischemic stroke is clearly one of the engines of growth. We're thrilled that the treatment guidelines have been extended from 6 hours and now up to 24 hours. Some of the studies are 16 hours. Some are 24 hours. That extension certainly should help expand the market. You're also seeing other clinical studies come out around aspiration. And so competitive activity certainly is intensifying in the space, but we believe it's a big market expansion story that will continue in the years ahead. We also had very good growth in our other 2 Neurotech businesses. Our CMF business had double-digit growth, and that's been a fantastic, smaller business for us but really steady performer. And our Neuro Powered Instruments has -- we've launched the Signature power drills that are just performing exceptionally well. So really, all 3 legs of the Neurotech stool have been performing very, very well for us. But the biggest clear upside, as you think about the next 5 years, is ischemic stroke. And we're just at the early stages of that market, and every participant is going to be benefiting as that is a market expansion story.

That's helpful. And then, Kevin, one strategic question for you. Given the success you're having with Mako, what's your interest in robotics outside of Orthopaedics, i.e., for soft tissue? It would seem to make some strategic sense for Stryker given your other offerings.

Yes. Thanks. Look, we really have a huge opportunity in front of us in heart tissue. So I would tell you that our focus for the short term, medium term -- at least medium term, maybe even long term, is going to be on heart tissue. We're really focused on hips and knees right now. There are other applications that you can imagine and other joints. Even within knees, you can imagine moving towards bicruciate retaining and other types of procedures, even within the existing joints. So the runway is significant in heart tissue. That is going to be our main focus for the short and medium term. One day, could there be something in soft tissues? Perhaps. But it really isn't a major focus within our company right now.

And your next question comes from the line of Joanne Wuensch with BMO Capital Markets.

Very nice quarter, particularly in Knees. Can we step back for a moment? And when you talk about the halo effect of Mako, we're looking at your whole recon business really, really moving forward nicely. What is that halo effect? Is it just for Knees? Or how broad is it spreading?

Joanne, I would say right now, it is primarily Knees. It's being able to get into competitive accounts where we either have no market share or where our market share is well below the average. And the first thing surgeons do who are adopting Mako, start to use our Triathlon Knee System, and so that's all either new or incremental revenue. And then as they start to use Mako, it's obviously a closed system. And then the sales force, once the sales rep gets in there, they're going to sell the entire portfolio. And so I would say the majority of the halo effect that we referenced is more around the Knee business than anything else right now.

But I am excited about the launch of our -- of Trident II hip cup. So we -- we're in limited launch the last couple of years, and we're now moving into full launch. And that hip cup, it's 3D-printed hip cup, would really -- that, combined with Mako, will be very compelling. Most surgeons, as you know, are happy with their hip outcomes, so they're not necessarily believing that the -- that robotic assistance will really help them until they try it, and then they realize it can be very powerful. So I'm hopeful that the launch of the new cup will also create a little bit of extra energy around Hips with Mako. But the killer application, which we've said really from day 1, from the time we acquired Mako, was going to be Total Knee. Given the level of dissatisfaction, the challenge of balancing a knee and everything that Mako provides really does help the surgeon, and the feedback that we're getting from them is it really does produce better outcomes for them. Obviously, we're in the process of trying to quantify that and trying to produce the evidence for that. But as we've done in the partial knee and shown that evidence, that's our intention with the Total Knee.

That's helpful. And as a follow-up question, big picture, Orthopaedics. Volumes seem to have a tough quarter, third quarter, came back fourth quarter. Are we starting to see more and more procedures shoveled onto -- shovel is the wrong word, but moved onto sort of the ends, the book ends of the year? I mean, is that how we should lay out our quarters, at least in recon for the 2018 time frame?

Yes. I don't think you should assume any big divergence from historical trends. Q4 is seasonally strong. Q3 was a particularly funky quarter in 2017 with 3 major hurricanes that clearly had disruption for us and others, and we have big market shares in those areas. So I wouldn't read too much into Q3 volumes being lighter. I think it was just one of those quarters where there was some specific event that took place. And again, as we mentioned, we're not expecting anything unique in the first quarter. Everybody knows where we've got tough comparisons. There's 1 less selling day as we mentioned, U.K. has got some challenges. But every quarter always has some type of challenge. So I don't think you should be assuming any big difference when you look at the quarterly growth rates, other than keeping an eye out, obviously, for year-over-year comps.

And your next question comes from the line of Isaac Ro with Goldman Sachs.

Question on margins. I think in the past, you've talked about that 30 to 50 basis points annually. And so if we look past sort of the noise currently, what needs to happen to hit the higher end of the range given the portfolio changes you guys have made? is it simply a function of top line growth? Or are there some longer-lived programs that we haven't spent time on today that you guys can point to that will release more leverage over time?

Yes. Isaac, that's a good question. I think as I think about the 30 to 50 basis points and I look out what programs are covered within that, I don't think there's an opportunity to accelerate those programs to drive faster savings. I do think that in programs like our indirect spend program, we are maximizing the amount of savings that we can drive. We'll enter a new phase for HR and finance shared services in the upcoming year that will contribute more to that equation, so I really think about it in terms of delivering top line at the upper end of the range. We'll also provide sort of more significant drop-through, and that will increase the op margin range to -- closer to 50 basis points.

Okay, great. And then maybe a follow-up on Entellus. It's obviously an interesting new therapy there, and I'm interested in the competitive landscape and how you guys plan to differentiate as you guys eventually take ownership of that -- the asset.

Well, I think the big opportunity there is we had a presence in the ENT market. We've been in that space for a number of years within our Instruments division, but it wasn't big enough to really carve it out and establish as its own standalone ENT group. This really is a catalyst to do that. It's been a very effective strategy for us. We've done it numerous times within our Instruments group. We believe focus drives results. So using this to really fill out the portfolio of ENT products, we're going to have a very comprehensive bag. We're buying an established sales force. We're going to integrate it with our own talent, invest in it, invest in that dedicated sales force. This is very core to Stryker's overall strategy. And we believe, as we move through that process, we'll be able to drive sales synergy. So it's going to be focused, being able to establish a dedicated sales force. We have terrific leadership within our Instruments group, and now we'll have a comprehensive product portfolio to really compete very effectively in the ENT space.

And our next question comes from the line of Kyle Rose with Canaccord Genuity.

Great. So a lot have already been asked, but I just wanted to kind of take a step back on the MedSurg side and just -- maybe you can provide your perspective on the hospital CapEx environment and just where we are from an investment perspective there. And then any additional updates as far as the product cycles across both Instruments as well as Endoscopy with the 1588 camera there. That would be very helpful.

Sure. We feel really upbeat around the CapEx environment. You saw another strong quarter within our Medical, which is our most capital-intensive business, for their core bed and structure business. We also saw a great quarter for Physio, which is a large capital component. So overall, that market seems, at the very least, stable. But clearly, I think what our results are reflecting is that we're taking market share within those segments. If you look at Endoscopy, they have just had the second year anniversary of the 1588 launch. So that was obviously a highly successful launch for that group. I think if you think about 2018, it's really going to be about driving NOVADAQ synergies as we've now, as we mentioned earlier, integrated the sales force. And there's a lot of opportunity to hopefully extend 1588 and to get into new accounts through our combined sales presence. Instruments, the big product launch right now is System 8. We're really pleased with that. You could clearly see it with the results, double-digit growth for Instruments in the quarter, and that's in the first year of launch. So they've got some good runway ahead of them, and certainly it will be one of the standouts for that division within -- for 2018.

Yes. And if you look at our MedSurg business, which we rarely get a lot of questions about, just look at the absolute performance, the growth in the quarter, the growth in the full year, the growth the last 3 years, I mean, this is becoming a really high-growth segment of the company and very consistent year after year. Now it does vary from division to division based on the timing of product cycles. But through the acquisitions that we're bringing into the MedSurg group, we really are turning that whole group into a growth engine for the overall company. It was consistent before. But now with the outperformance that we have versus the market, it's pretty meaningful.

And your next question comes from the line of Josh Jennings with Cowen.

I was hoping to just circle back on margin guidance for '18. I think you laid out absorption of Entellus and NOVADAQ potentially margin dilutive, same level of spend into the CTG program and potentially getting to the midpoint of that 30 to 50. Should we be thinking about a margin outperformance in '18 within that range towards the top end of that 30 to 50 range? Or is there a comparison issue that we should be thinking about as well?

Yes. No. I think where we are in the year and providing guidance at the beginning of the year, I think it's more safe to probably target the middle of that range than the upper end of that range. As I said, as we look to sales performance and things like Sage coming back and ramping up, bringing our Puerto Rico facility back up to 100%, those things will give us more confidence that we potentially could be to the upper end of that range.

I guess by just trying to be clear about the headwinds that you're facing with the acquisitions, same level of spend, is that 30 to 50 actually a higher range considering the headwinds you're facing? Or does the comparison from '17 offset those headwinds?

Yes. No. Really, the comparison from '17 is a pretty direct offset to the same headwind, so we really are bracketing the 30 to 50 basis points of op margin improvement.

Okay. And I wanted to follow up with a Mako question and just in terms of systems placed. Are you getting any penetration into ambulatory surgical centers and knee replacements are often in-patient only? Our understanding is that ASC still can't get reimbursed from Medicare. But also any commentary in terms of how you're positioned for the potential eventuality of recon procedures moving into those facilities?

Sure. You're correct around the reimbursement. They're not being available in the ambulatory surgery center. We have had Mako placement sales into that setting, but the vast majority is still in the hospital setting. We do think you're going to see a shift of procedures, but it's going to be gradual. You really have to target the ideal patient, and a lot of these patients have challenges that are associated with other conditions that don't suit them well to that setting. And I think the industry is still working through how to make sure they've got the right protocols in place. So short answer, yes. We have sold some, but the vast majority are in the hospital setting. And I think that would be the trend this year as well.

And your next question comes from the line of Kaila Krum with William Blair.

So a follow-up on your response to Larry's question on Robotics. It sounds like you still have a lot of opportunity in Total Knee and other applications within orthopaedics. We'd imagine Spine. I mean, can you just walk us through sort of that -- what that development process would entail to extend Mako into those other categories, just in theory?

Yes. At this point, it's really too early for us to give a whole lot of visibility into the Mako pipeline. We have a lot of work to do given we've penetrated about 10% of our customers for the Total Knee, and that's where we want our team's focus to be. We obviously have some R&D programs underway. You've heard Kevin talk about opportunities in other joints, and we do think that eventually could include spine. But it's a little early right now, and we really want to make sure the focus is truly optimizing the opportunity, given the size of it for the Total Knee. But clearly, opportunity, longer term, in other joints.

And then just on Spine. Can you guys speak a little bit about what sort of foundational efforts you're putting into place today just to help recover the growth profile there? I mean, have you found this business to have become even less of a priority, just in terms of near-term investment, given some of the market growth headwinds we've seen in that area?

No. Actually, we -- on the contrary, this is a business that really responds well to innovation. We've seen that ourselves when we've had the right innovation that we bring to the market, we grow, and we grow faster than the market. We launched our second Tritanium product cervical in the fourth quarter. We launched a new pedicle screw system called Serrato in the second half of the year. We're seeing a very nice uptick from those products. So if anything, we're actually continuing to invest and even increasing the amount of R&D investment in the Spine business. We're very committed to it long term. We believe it's very important. It's the largest orthopedic market. There are huge unmet needs. It's connected, as you see, with 3D printing, where we're able to leverage that technology across, not just spine, but also hips and knees. So there's a lot of sharing of technologies. It's part of the neurotech group of many hospitals and part of their service lines. So we remain committed to it. We're investing in innovation. Innovation does drive growth, but we have to be realistic. It is a tough market. The market conditions aren't great, but we are very committed to the business and really believe innovation is the way to continue to grow in Spine.

And your next question comes from the line of Craig Bijou with Cantor Fitzgerald.

Just a couple of quick ones on Mako. I wanted to talk about -- or I wanted to ask about the 20% of competitive surgeons who are using Triathlon for the first time. I think that's a new metric that you guys have provided. So I just wanted to get your sense for when you talked about taking market share, the hundreds of basis points, how does that 20% compare to your expectations? And then where could we see that going forward?

Yes. I think, overall, we've been really pleased with the launch and the ramp that we're seeing, both in getting into competitive accounts as well as being able to upgrade robots in the field and install new robots. And so it's a combination. You're growing 3.5x the overall market. Clearly, that's coming from both getting into accounts that have never had Triathlon as well as other competitive accounts and our own customers. And so it's very difficult to break that apart in terms of the market share gains. It's a combined effect. And I would say, in terms of expectations, we're just really pleased with how 2017 unfolded. And we've got a lot of work to do to continue the trajectory we expect to perform after 2018.

And there are no further questions at this time. And I would now turn the conference over to Mr. Kevin Lobo for any closing remarks.

So thank you all for joining our call. Our conference call for the first quarter 2018 results will be held on April 26. Thank you.

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