Welcome to the fourth quarter 2018 Stryker earnings call. My name is Josh, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Following the conference, we will conduct a question and answer session. During that time, participants will have the opportunity to ask one question and one follow-up question. If you would like to ask a question, please press star, then the number one on your touch-tone phone. This conference 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 and our recently completed acquisition of K2M. Glenn will then provide additional details regarding our quarterly results before we open the call to Q&A. 2018 was a stellar year for Stryker. Following tough comparisons from a successful 2017, we delivered impressive organic sales growth and leveraged adjusted earnings gains. Our talented team has launched new products, drove sales and marketing execution, and benefited from prior acquisitions that have broadened our portfolios. We delivered organic sales growth of 8.6% in Q4 and grew full-year organic sales by nearly 8%. Importantly, this performance reflected broad-based strength across divisions and regions.
MedSurg had an excellent Q4, up 10% organically, as the three large divisions, Endoscopy, Instruments, and Medical, grew between 9% and 12%. MedSurg results reflect strong commercial excellence, ability to steadily launch new products, and successfully integrate acquisitions. For example, the Physio-Control business within Medical grew double digits in 2018. In 2019, MedSurg will have a similar flow of new products, and Endoscopy will launch its next-generation camera, the 1688 camera, at the end of the first quarter. Neurotechnology and Spine increased over 8% organically as Neurovascular, CMF, and Interventional Spine all registered double-digit organic growth. We are excited about the acquisition of K2M, which meaningfully enhances our competitive position in the spine market. Orthopaedics posted solid Q4 organic growth of 7%, led by Trauma & Extremities, Knees, increasing momentum in Hips, and excellent Mako growth, which Katherine will detail shortly. U.S.
Trauma & Extremities achieved a major milestone, crossing $1 billion in sales for the first time in 2018, resulting from a multi-year period of terrific growth. Geographically, our Q4 growth was balanced as the U.S. was up 8% organically, while International delivered double-digit gains powered by emerging markets and Europe. On a full-year basis, emerging markets grew double digits, and Europe once again grew high single digits. When combined with strong performances in South Pacific, Japan, and Canada, full-year international organic growth was higher than U.S. growth. Our focus on leveraging the strong top line was evident in Q4 as operating margin increased 30 basis points year over year despite significant deal dilution, including K2M. Meanwhile, we continue to make meaningful investments in our sales forces and R&D to help ensure we maintain our revenue growth going forward.
Our teams remain highly focused on executing our Cost Transformation for Growth program, which combined with our top-line performance, allowed us to deliver EPS at the high end of our targeted range at $2.18 a share, up 11% year over year. Turning to 2019, our organic sales growth is expected to be in the range of 6.5%-7.5%, representing the highest initial revenue growth guide for Stryker in a decade. Of note, we exited 2018 with a healthy order book for our capital businesses and have a similar mix of headwinds and tailwinds as we had entering last year. While 2019 will largely be an integration year as it relates to K2M, the team is off to an impressive start with notable excitement across our combined selling organizations.
Despite sizable deal-related dilution, we fully expect to achieve our target of 30 basis points to 50 basis points of annual operating margin expansion. With sales growth once again expected to be at the high end of medtech and ongoing margin expansion, we are targeting full-year adjusted EPS of $8-$8.20 a share, a year-over-year increase of 10%-12%. In closing, I want to thank our sales, marketing, R&D, and support teams around the world for their efforts and results in 2018, enabling us to deliver on our commitment to stakeholders. With that, I will now turn the call over to Katherine.
Thanks, Kevin. My comments today will provide an update on our Q4 acquisition of K2M, as well as our Mako performance. In November, we completed the acquisition of K2M for roughly $1.4 billion, which significantly bolsters our competitive position in the spinal market. K2M provides Stryker with a highly complementary and innovative product portfolio that is resonating with our customers and spinal sales force. The teams have been focused on optimizing the integration, we are leveraging our years of deal experience to ensure we are moving quickly to align the organization.
We have made considerable progress since closing, including establishing the spine global senior leadership team of the combined organization. We are actively building out the remainder of the organization, which should be completed by the end of the first quarter. Importantly, the sales leadership organizational structure has been announced along with their respective territories. The leadership team is working with the sales teams across the globe to align the sales force with our hybrid selling model, and we expect this to be completed in Q1. Additionally, the cross-selling plan related to the combined product portfolio is in its early stages, and additional cross-selling progress will be made throughout the quarter. We remain on track with our deal model and expect our combined pro forma core spinal revenue to deliver mid-single-digit growth in 2019.
We will provide a further update at AAOS as Eric Major, President of Stryker Spine, will be participating in our booth tour and will be available for Q&A. Turning to Mako, we had a particularly strong performance in Q4 with 54 robots installed globally, a record level with over 40% in competitive accounts. Geographically, the U.S. leads the way with 36 robots versus 27 robots in the prior year. Globally, we now have 642 robots installed, with 523 robots in the U.S., the majority of which have been upgraded to the Total Knee System. During the quarter, we certified roughly 250 surgeons on the Total Knee, bringing the total number of surgeons trained since launch to approximately 1,600 surgeons. There were roughly 24,800 robotic procedures performed in the U.S. during the quarter, with full-year Mako procedures topping 76,900 procedures.
Mako Total Knee procedures increased over 35% sequentially to approximately 15,500 procedures, with knees representing roughly 60% of all Mako procedures performed in the U.S. in 2018. We also saw continued uptick in utilization rates on the robot, which climbed over 25% sequentially in Q4 and up 30% year-over-year. The ability to perform a cementless total knee on the robot, which was approved by the FDA in Q4 2017, is also helping further drive cementless knee adoption as we exited 2018 with over 30% of our knees now cementless. Combined, we believe these data underscore that Mako is undoubtedly a powerful marketing tool for hospitals. The continued demand for the robot and steady acceleration in its utilization by surgeons is being driven more by the powerful clinical results and patient benefits.
Looking ahead to 2019, we believe we are well-positioned to continue to drive Mako momentum as we exited the year with a healthy orders pipeline for the robot. During the year, we saw strong peer review evidence that Mako Total Knee delivered better clinical outcomes for patients and lower 90-day cost of care, which benefits the payer. We expect to continue to build on the clinical data in support of Mako as we pass the two-year mark from the full commercial launch of our Total Knee application later this quarter. We look to further update you at the booth tour at AAOS, which will include Mako, and also anticipate further clinical data to be presented at AAOS later in 2019. With that, I'll now turn the call over to Glenn.
Thanks, Katherin. Today, I will focus my comments on our fourth quarter financial results and the related drivers. Our detailed financial results have been provided in today's press release. Our organic sales growth was 8.6% in the quarter. As a reminder, this quarter included the same number of selling days as Q4 2017. Pricing in the quarter was unfavorable, 1.5% from the prior year, while foreign currency had an unfavorable 1.2% impact on sales. For the quarter, U.S. sales continued to demonstrate strong momentum with organic growth of 7.8%, reflecting solid performance across our portfolio. International sales grew 10.9% organically, which was balanced across our international regions. Organic sales growth for the year was 7.9%, which exceeded our most recently raised full-year guidance of 7%-7.5%. U.S. organic growth was 7.5%, and the international organic growth was 8.8%.
2018 had the same number as 2017, and price had a 1.4% impact on sales for the full year. Our adjusted quarterly EPS of $2.18 increased 11.2% from the prior year, reflecting strong leverage on sales growth, combined with good operating expense control. Our fourth quarter EPS had no significant impact from foreign exchange rates, neither translational or transactional, which was consistent with our expectations. Our full-year EPS of $7.31 increased 12.6%, reflecting strong sales growth and disciplined leverage. We'll provide some highlights around our segment performance. Orthopaedics delivered constant currency and organic growth of 7%, including organic growth of 7% in the U.S. This performance was highlighted by strong performance in Trauma & Extremities of 7.1%. Additionally, U.S. hips grew at 4%, U.S. knees grew 5.8%, and our other orthopedic business grew 44.2%.
Within the knee business, we continue to see strong demand for our Mako Total Knee platform and our 3D-printed products. Internationally, Orthopaedics delivered organic growth of 6.9%, which reflects solid performances in Europe, emerging markets, and Canada. MedSurg continued to have strong growth across all businesses in the quarter, with constant currency growth of 11.1% and organic gains of 10.1%, which included an 8.5% increase in the U.S. Instruments had U.S. organic sales growth of 9%. We had exceptional growth in our waste management, SurgiCount, and surgical power businesses. Endoscopy delivered U.S. organic sales growth of 5.3%, with strong performance across its sports medicine, communications, and ProCare businesses. As expected, Endo's video business moderated as our customers prepare for the late Q1 launch of our next generation 1688 camera system. Of note, however, was the NOVADAQ video system, which had robust double-digit growth during the quarter.
Medical had U.S. organic growth of 12.3%, reflecting solid performance in its bed, stretcher, EMS, and Sage businesses. Internationally, MedSurg had organic sales growth of 15.7%, with strong performances in Europe, Australia, and emerging markets. Neurotechnology and spine had constant currency growth of 21.4%, driven by our K2M acquisition, an organic growth of 8.4%. This growth reflects strong performance within our neurotech product lines, which had organic growth of 11.2%. Our U.S. neurotech business posted organic growth of 7.3% for the quarter, driven by strong demand for our hemorrhagic ischemic stroke, CMF, and our neuro-powered instruments. We continue to be pleased with the progress of our Entellus commercial execution and integration. Our spine business saw moderate pricing pressure in the quarter, offset by double-digit growth of our IVS business and our titanium implant products. We made significant progress on our integration of K2M, and this will continue in 2019.
Internationally, Neurotechnology and Spine had organic growth of 10.6%. This performance was driven by continued strong demand in Europe, China, and Japan. I will focus on operating highlights in the fourth quarter. As noted in the press release and discussed in our first quarter 2018 earnings call, the adoption of ASC 606 primarily had the impact of reclassifying certain expenses from SG&A to sales. All references to basis points improvements are net of this impact. You should note that for 2019, the ASC 606 reconciliation in our press release will no longer be required. Our adjusted gross margin of 65.6% was unfavorable 55 basis points from prior year quarter. Compared to the prior year quarter, gross margin was favorably impacted by acquisitions, offset by price, foreign exchange, and business mix.
For the full year, our adjusted gross margin of 66% was in line with the prior year, was primarily impacted by price and business mix. R&D spending was 5.7% of sales, which was 30 basis points lower than the prior year quarter. For the full year, R&D spending was 6.3% of sales, which was 10 basis points lower than prior year. Our adjusted SG&A was 32.4% of sales, which was favorable to the prior year quarter by 55 basis points. For the full year, our adjusted SG&A was 33.9% of sales, which was favorable to the prior year by approximately 30 basis points. For both the quarter and the year, this reflects the continued focus on operating expense improvements through our Cost Transformation for Growth, CTG program, including key projects focused on indirect purchasing and shared services.
This is offset by the negative impact of acquisitions and continued planned investments in other CTG programs, like our ERP project and our PLCM project. For the quarter, our adjusted operating margin was 27.5% of sales, which was 30 basis points favorable to the prior year quarter. Our full-year operating margin was up 40 basis points from the prior year, delivering on our commitment of 30 basis points-50 basis points margin expansion. Our operating margin primarily reflects good leverage and continued operational savings, offset by investments and acquisitions, the latter of which had an approximately 50 basis points negative impact for the quarter and the year. I will provide some highlights on other income and expense. Net interest income and expense decreased from prior year quarter, primarily due to favorable interest rates.
Our fourth quarter adjusted effective tax rate of 17.6% was in line with our operating tax rate. Our full-year effective tax rate was 16.7%, which reflects benefits primarily from stock compensation expenses. We anticipate an effective tax rate of 16%-17% in 2019, which includes the benefit from optimization of our geographical operations and stock compensation expenses. Focusing on the balance sheet, we continue to maintain a strong position with $3.7 billion of cash and marketable securities, of which approximately 25% was held outside of the U.S. Total debt on the balance sheet was $9.9 billion, of which $1.25 billion relates to maturities that will be paid off in Q1 2019. Upon completion of this, we anticipate total debt to be approximately $8.65 billion. Turning to cash flow, our year-to-date cash from operations was approximately $2.6 billion.
This reflects increased earnings, which are somewhat offset by increases in working capital, including higher tax payments as a result of tax reform, and specifically, required payments related to the U.S. toll tax on previously untaxed profits. In January 2019, we repurchased approximately 1.9 million shares. We anticipate that capital expenditures will be $600 million-$650 million in 2019. Now I will provide 2019 guidance. Based on our momentum from 2018 and assessment of the current economic and market conditions, we expect organic sales growth to be in the range of 6.5%-7.5% for 2019. This growth will vary by quarter as we typically see stronger quarters in Q3 and Q4, especially given new product ramping and acquisition anniversaries. As you update your quarterly models, please note that Q1, Q2, and Q4 have the same number of selling days, while Q3 has one more selling day.
If foreign exchange rates hold near current levels, we anticipate sales will be negatively impacted by approximately 0.5% in 2019, and EPS to be negatively impacted from $0.00-$0.10 per share for the full year, and $0.02-$0.04 for the first quarter. We also expect continued unfavorable price reductions of 1%-1.5%, which is fairly consistent with the pricing environment experienced in 2018. In addition, we expect to continue to deliver on our full-year commitment to expand operating margin. Including the negative impact of our current acquisitions, we anticipate expansion of 30 basis points-50 basis points of operating margin in 2019. We expect that acquisition integration activities will have a bigger negative impact on operating margin during the first half of 2019.
Finally, for 2019, we expect adjusted net earnings per diluted share to be in the range of $8.00-$8.20 for the full year, including approximately $1.80-$1.85 for the first quarter. Now I will open up the call for Q&A.
Thank you. We will now begin the question and answer session. If you have a question, please press star, then number one on your telephone keypad. If you wish to be removed from the queue, please press the pound key. As a reminder, callers will be limited to one question and one follow-up question. Your first call comes from Robbie Marcus with JPMorgan. You may proceed.
Oh, thanks so much, and congrats on the great quarter. At the November Analyst Day, you told us that 2019 was going to look very much like 2018, and you've delivered on that promise with guidance very much in line with 2018. Can you give us a little bit of puts and takes in what are the key drivers on the top line for next year that we should be aware of by business?
Yeah. I think if you look at it overall, we do have very similar headwinds, tailwinds. We have some important product cycles that we're going into. Of note, Endoscopy is gearing up to launch their next generation camera, the 1688 camera, which will happen by the end of the first quarter. That will be significant for them. We finished the year on Orthopaedics with a very healthy order book across our capital businesses, including Mako. With 54 robots in the quarter and a healthy order book, we expect another strong year for Mako, and we're seeing an acceleration in our hips, given the launch of our 3D-printed cup that has been really well-received. That'll be a driver.
We've launched several new trauma products, including a new intramedullary nailing system that was launched late in the fourth quarter, and that helped drive the acceleration sequentially in trauma and will be a factor as we look to this year. If you look across the board into the MedSurg businesses, there's a lot of momentum across the board. Neurovascular has multiple product launches. We're still seeing strong momentum with Atlas. They're also gearing up for the launch of their aspiration system and related accessories there. Medical has new product launches happening with Physio-Control, a new AED that's available OUS and is launching in the U.S., as well as continued acceleration in Sage as we move past some of the regulatory challenges we had. Instruments is really benefiting from a really expanded product portfolio on the heels of several acquisitions.
Obviously, we're also looking for continued acceleration in Spine to get to that pro forma Spine revenue growth of 5% for 2019. There's no one single thing. We really are a number of singles and doubles, the totality of which is really allowing for this strong top line, which we believe will again be at the high end of med tech.
Glenn, a financial question for you. I know you don't guide by the different line items on the P&L. With a couple deals that are getting integrated, and it looks like a gross margin that came in a little bit below the street in the fourth quarter, can you give us some high-level thoughts of how we should be thinking about the P&L and as we think about operating margin expansion, what's the underlying versus the M&A impact for next year? Thanks.
While we don't specifically guide on gross margin, I would tell you to keep in mind that gross margin is really impacted by many factors. The largest of these really being mix, price, and just productivity and efficiency. If we think about sort of the programs we have in place to improve gross margin as well as operating expenses, I sort of break them into two categories. Gross margin is really impacted by our Product Life Cycle Management programs and our plant network programs. Those really provide a longer sort of period before the benefits really kick in. If you think about operating expenses, savings will be driven by improved sales leverage, plus programs that we have around indirect spend and shared services. Most of these, we've started to see some savings.
On the negative side, though, M&A will continue to impact our op margin negatively, especially in the near term, as we see sort of the impacts from operating expenses on acquisitions as we seek to really ramp sales on those acquisitions. I would say, in summary, in the nearer term, we probably see more opportunities out of operating expenses near term. Over the longer term, we'll drive better savings at the gross margin line.
Your next call comes from the line of Bob Hopkins with Bank of America. You may proceed.
Oh, great. Thanks, and good afternoon. Kevin and if it's okay, I wanted to start with just a little bit of an overview. Obviously, it was an exceptional performance in the quarter and for the year. The company's obviously executing very well, really seeing strength across businesses and geographies. I guess my question is: Is this all sort of Stryker execution and product flow, or do you also think that the markets that you're participating in are showing some good momentum? Maybe talk a little bit about the health of capital markets, health of core ortho markets, because it seems pretty obvious you're executing well. I'm curious how much of this is also just healthy markets as well.
Yeah, thanks, Bob. As you've seen over the past six years, we've consistently outperformed the market somewhere between 200 basis points, 250 basis points. That's been an every year thing. This year, we exited the year feeling very bullish about doing the same again next year. The markets in MedTech have moved up a little bit over each of the last few years, so I would say the market outlook is healthy. Our order book is a good sign of that, the fact that our capital order book is very good. Look at something like beds and stretchers with double-digit growth, and really without any significant new products. They had a couple of minor products, but nothing major. That's really our great execution and I would say fairly healthy markets.
What's really different about 2018 is the performance that we had outside the United States, which you saw we actually grew faster organically than we did inside the U.S. We had very good U.S. performance. This has been a multi-year effort to really improve our globalization. Europe, as you know, has been a star for us the last few years, but in addition to that, we really stepped it up in Japan and emerging markets pretty much across the board, had terrific performance. I'm really excited about the ability to sustain this performance outside the U.S., which complements what we already know is our very strong offense inside the U.S.
One specific question on knees, since obviously that's been such a nice visible growth driver for the company. The Mako numbers were super impressive this quarter in terms of procedures and systems sold. You grew, I think, your knee franchise just in the high sixes in 2018. When you kind of look at the momentum of the knee business in terms of Mako, in terms of cement-less, is there enough momentum in the business that you can continue to outpace the market in knees to the degree that you've been doing in 2018 as you look to 2019?
Yeah, Bob, that's fully our expectation. We've got, as we mentioned, a strong order book, the mounting clinical data, all the data points that we look to, whether it's utilization rates or growth in surgeons trained, are all really positive. We fully expect to continue to take meaningful market share. It's going to bounce around quarter to quarter because the recon market bounces around. We were up against really tough comps in the U.S. this year, still we have to wait for everybody to report, but I think we grew by 100 basis points ahead of the market. That's absolutely the expectation for this year.
Yeah. Bob, I'd just add that we expect that Mako will continue to grow, and we're still in the early stages. It's not even two years since our full launch. We also expect cement-less to continue to grow. To exit the year over 30% is something that we feel very good about. Frankly, when a competitive surgeon switches, they're changing their implant. If they're learning Mako, a lot of times they'll initially switch with cemented knees. Once they gain confidence and comfort with Mako, they will then move to cement-less. Cement-less still has significant runway, and surgeons are really pleased with the results they're seeing with their patients, and that's what's causing the extra uptake. We believe 2019 will be another year of strong above-market performance in these.
Your next call comes from the line of David Lewis with Morgan Stanley. You may proceed.
Great. Just a question for growth for Kevin and maybe a quick follow-up. Kevin, as you sort of mentioned, you're obviously finishing the year with the strongest momentum I think I've seen in several years and the strongest guide in 10, obviously. If you think about how the business has performed in 2018 relative to 2019, do you expect the same general relative performance across those business segments from a growth perspective in 2019 versus 2018? Or are there significant segments you think will change from a relative perspective?
Thanks, David. I would tell you that we've got strong momentum across our businesses. I would expect similar performances out of Orthopaedics, similar performances out of Medical. Endoscopy should move up a little bit given the 1688 camera launch. You've got some really tough comps in some of the Neurotechnology businesses, which I still think will grow very robustly, but perhaps moderate just a hair. Overall, there's strength everywhere. Really, the one business that hasn't been performing as well for us in the past has been spine. Now, with the K2M acquisition, I think that story changes dramatically starting in 2020. In 2019, we won't report K2M within our organic sales, but what we will provide each quarter are pro forma results so you can see what the combined business is doing.
We expect mid-single-digit performance on a pro forma basis. Obviously in 2020, that'll then roll into organic. We're really excited with the speed of that integration and being able to post these numbers with a spine business that's been essentially flat for the past five years is pretty remarkable.
Okay. Kevin, thank you. I just have two quick follow-ups, one for you, and you already talked to it, touched on it a little bit. The Neurotech business was probably the only business Trauma recovered. Neurotech was the only business in the fourth quarter that looked like it decelerated. That was surprising just in light of the product cadence and momentum there. Maybe you can talk through that. For Glenn, to the extent that MedSurg outperforms in 2019, any concerns that mix-driven pressure would sort of take you out of that 30 basis points-50 basis points range, or you feel very confident in that 30, 50 basis points of margin? Thanks so much.
On the Neurotechnology businesses, I'm very bullish on the prospects in 2019. As Katherine mentioned, Neurovascular is launching a number of exciting new products. We have the NeuroPower drills, the CMF business. They're all very healthy businesses. You have Entellus now that's reported as part of the Neurotechnology business. That's doing very well, and it's in integration. Big comps from quarter to quarter, you'll see a little bit of movement, but I would expect continued robust performance there.
David, on your question on MedSurg. We've been balancing that story probably for the last two years as we've pushed forward with a lot of these CTG initiatives. I do expect robust growth out of MedSurg. The minus there is lower gross margins, but frankly, in the operating expense side of MedSurg, they perform on a lower level of burden than the Orthopaedic businesses do. Overall, I think, based on what we're forecasting, I think we've balanced so that we can deliver the 30 basis points-50 basis points that we're promising.
Your next call comes from the line of Raj Denhoy with Jefferies. You may proceed.
Hi, good afternoon. Maybe start a little bit with the emerging markets performance in the quarter. Double-digits, it's been strong now, I think, for a couple of quarters. Is there anything in particular you can point to in terms of those markets and the sustainability of growth in emerging markets for you?
We've been working on this, as you know, for a number of years, and all four quarters were double-digit growth this year for Stryker, which really is encouraging as I think about the future. We made a lot of leadership changes in Latin America. Latin America had a terrific year in 2018. Same thing with the EMEA markets. Turkey, we bought out a distributor, and they had a very strong performance. Russia is performing well. China, of course, is the most important of the emerging markets, and I would say we had very strong performance in China. A lot of new leadership put in place, and even our Trauson business had a nice bounce-back year within China. India, we had a tough sort of beginning part of the year, the first couple of quarters.
We've made some leadership changes with a new managing director, and they had a very strong fourth quarter, and the outlook is pretty bright. For us, it's been a story about really getting the talent offense focused and firing, and that's been an effort that's taken us a couple of years. I'm very optimistic that we'll be able to continue this trend in the emerging markets. As you know, it represents a very small percentage of Stryker's overall sales at around 6%. For us, that's a huge opportunity for the future, and we're better positioned in emerging markets than we have been since I've been at Stryker.
No, it's helpful. Maybe just, I could follow up with one product area. Medical, it's now your biggest segment, or has been your biggest segment for a while now, but it was also one of your fastest-growing, if not the fastest-growing. You mentioned beds and stretchers, but are there other areas within that category in particular that you're seeing really strong performance in, whether Sage or other areas?
Well, I mentioned in my opening remarks that Physio-Control had double-digit growth, which to me was really exciting. We have a new AED outside of the U.S., but it only got approval in the U.S. at the end of the year, so we didn't see any of that benefit. This is really a terrific sales and marketing execution, and we've put in some Stryker leaders there a couple of years ago, and they really are driving more of our Stryker sales culture in a business that already had terrific products. That's one highlight. Sage recovered somewhat, but frankly, I think we'll have a better year in 2019 than it did in 2018. Had a strong fourth quarter, but really had to make up for the losses of the regulatory actions and remediation. They had mid-single digit growth.
It was really the other parts that our core Medical business and physio that had very strong performances.
Your next call comes from the line of Matt Miksic with Credit Suisse. You may proceed.
Hi, thanks for taking the questions. Couple of quick follow-ups on Mako and the strong trends there. Just one. Curious to see what the dynamics have been like in the marketplace as surgeons have learned a little bit more, hospitals a little bit more about this competitive system that has been kind of on track to come to the market. That was unveiled sort of in the back half of the year. Curious how that has impacted the U.S.? OUS, I just thought it was worth noting and maybe talking about what has been this driver of really a pretty significant step up in system placements overseas and what's triggering that and what we should do about modeling that? I have one follow-up for spine, if I could.
Yeah. Thanks, Matt. I think what we've seen is continued execution and really building on the momentum, given the years that we've been at robotics, building on the clinical data. We're the only robot out there with haptics, with the ability to balance the knee, and we're seeing the benefit of that in the clinical data, some of which we talked about on the last call and we'll continue to see come out throughout this year, particularly as we approach August. We had a record number of robots in the quarter, and we've got a healthy order book. It isn't any one single factor. It is building on the momentum and the clear benefit that surgeons are seeing. We're continuing to see hospitals purchase second and third robots, which really speaks to the mounting benefits that the entire surgeon group sees.
That's the same thing driving it outside the U.S. Different geographies, we see different uptake given the different healthcare systems. Clearly, we're seeing very healthy growth outside the U.S. I think the U.S. will continue to be the big driver. We have a lot of runway. I think it's helpful given all the data points we give you around system sales, pricing, utilization rate, surgeon strain, that as you look at competitive offerings, will make it really easy to do a comparison.
That's great.
The other thing
Oh, go ahead. Go ahead, Kevin.
Yeah. Just before you move to spine, Matt, I would just add that we only have a small number of placements in China and Japan. I think they're going to be very big markets in the future, but given the regulatory-timeline. We still don't have approval for the knees. We have approval for hips, which of course are big markets, and we've just started to sell there. We also built a training center in Hong Kong that'll be used to train the surgeons in the Asia-Pacific region on Mako. We're very bullish about the continued growth. I think 2019 may not be a great year in those two markets. Certainly, the rest of the world, Latin America, Europe, will continue to be good. I think starting in 2020, you could expect to see a pretty significant uptick in Mako in China and Japan.
That's excellent. Thanks. And then on spine, I guess the question I would ask, you've got a great asset, obviously, in our opinion anyway, that you're rolling into the Stryker tent. You brought in leadership, which is a plus. Obviously, it's strong in complex and in its 3D-printed products and MIS and a variety of other leading-edge competitive ends of the market. Great potential setup. I guess, what, if anything, are you focused on or worried about in terms of the integration? What are you most focused on making sure that you maintain here to maximize the impact and minimize the dysenergies?
The U.S. sales force integration is the most important part of this integration. That's taking the bulk of our energy. Prior to the closure of the deal, in a clean team environment, we actually looked at all the territories, looked at all the overlap. I can tell you, I'm wildly impressed with how fast Eric and his leadership team, which is a mixture of Stryker and K2M people, how fast they've moved on making decisions on the regional managers, on making decisions on the territories. Once people know who their surgeons are and have access to the full bag of products, the quicker you can do that, the quicker you'll make sure that you can grow the business and not have dysenergies. As you know, that's been the challenge of spine deals in the past.
I would say they're ahead of where I thought they would be at this stage, that's what we're going to watch most closely is U.S. sales force integration, and making sure that we don't lose sales reps or that we don't lose that surgeon relationship. The good news is we didn't have a lot of overlap. That's one of the things we had modeled a certain amount of overlap, and when we went in with the clean team to look at the actual overlap, it was less than we had modeled. I think the risk is lower for us than what you've seen in previous spine deals, but that is the biggest single risk with this integration. Each quarter, we'll give you an update on how that's going.
Your next call comes from the line of Pito Chickering with Deutsche Bank. You may proceed.
Good afternoon, guys. Jumping on Raj's question, if we drill down into the emerging markets, what product lines are you guys seeing the most growth in? Do you see that product line growth across all of your emerging markets?
Yeah. It's really well-balanced. There's not one single product category that stands out. We've always had a pretty strong Endoscopy division in the emerging markets, and that continues to be the case. I would say, picking up on our implant business, that's an area that we've been particularly soft in the past. We're starting to really pick that up in the emerging markets. It's really kind of across the board. Given our small presence, we have a long way to go to really, across our businesses, to grow, but it isn't just in one area. What I'm most excited about is if we get the implant business really rolling, that provides the stability and the scale to then be able to deal with the capital fluctuations that invariably occur in these markets.
In the past, we've been a little bit overweight in the capital equipment area, and that's the part that we're really focused on, and I'm feeling very encouraged about our progress.
All right. Fantastic. Then a quick boring tax question for you. You got a tax rate of 16%-17% versus 16.7% for the full year of 2018. Did you face any impacts from recently proposed IRS regulation that closed the hybrid tax loophole? Has it impacted you guys either in 2019 or in 2020?
Yeah. Right now, we are not estimating an impact. We really are pretty much sticking with the tax guidance that we developed at the beginning of this year. We have been monitoring the regs as they've been coming out. As you can imagine, it's a moving target as they continue to issue more guidance around some of the more complex parts of the new tax laws. Right now, we don't see an impact from that.
Your next call comes from the line of Chris Pasquale with Guggenheim. You may proceed.
Thanks. Katherine, Mako obviously had a very strong quarter. The magnitude of the beat in that other ortho line seemed a bit outsized relative to the step-up in robot placements. You were up maybe 15 systems, 17 systems from 2Q and 3Q. Revenue for that segment jumped by almost $50 million. Was there something else in there that contributed to that upside?
Yeah, maybe I'll take this one. The real primary impact to that sales line, obviously relates to the robust installs of our Mako robot. There were also impacts related to the mix of sales that's in that line. We saw a higher percentage of kind of recognizable capital revenue that hit that line, and that was combined with positive price, increased maintenance, and also sort of less erosion from bone cement. All that kind of added up to what you're seeing there.
That's helpful. Thanks. One detail, one for Glenn. Can you just go back to your comment about the expected impact of currency on earnings this year? $0.00-$0.10 seems like a pretty wide range, and I would have thought that the bulk of the impact would fall in Q1. Can you just walk through your thinking there?
Yeah. It's early in the year, and it's obviously something that's very variable depending on our own operations and also what happens to currency. Right now, we're seeing probably the greatest impact of that $0.00-$0.10 forecasted to hit Q1. Then we expect it to be pretty moderate for the rest of the year. That's kind of where our guidance is right now based on what we can see.
Your next call comes from the line of Larry Biegelsen with Wells Fargo. You may proceed.
Good afternoon. Thanks for taking the question. One on Mako, one on M&A. Katherine, at the beginning of, I think, 2018, you said Mako units would grow year-over-year, after strong 2018 with about 158 robots. Do you still think units can grow, placements can grow year-over-year in 2019? Can you remind us of how common volume-based contracts are for you guys versus pure outright sales of the robot? I have one follow-up.
Yeah, the majority are pure outright sales of the robot, and we absolutely expect to have a double-digit growth in robot installs this year.
Thank you. On M&A, Kevin or Katherine, I can't remember a year where Stryker didn't do a few acquisitions. Could you just kind of give us a snapshot of how you're thinking about M&A in 2019, and how much flexibility you would have on the 30 basis points-50 basis points of operating margin improvement in 2019? In other words, would you be willing to sacrifice that? Thanks for taking the questions.
Well, as you know, the nature of M&A is inherently unpredictable. It is our number one source and planned use of cash. That's not changed. In six years, I would expect us to continue to be acquisitive. As it relates to dilution, once we see an asset that we think will be really value-creating for Stryker, we're going to want to do that deal. We'll look at the related dilution and figure out whether we can offset it or not. As you've seen, we are very committed to operating margin expansion. We've been able to offset NOVADAQ, Entellus, K2M, deal after deal that are high growth deals that have dilution, we've been able to offset. In the hypothetical sense, if we saw one that was really a fantastic asset, it caused us to be lower in the range, well, we would then communicate that.
I wouldn't say it would be off the table, that doesn't take away from the efforts we're going to make to continue to drive margin in our core underlying business.
Your next call comes from the line of Glenn Novarro with RBC Capital Markets. You may proceed.
Hi, good afternoon, guys. Kevin, a question on Trauma & Extremities. Results were better fourth quarter than we saw in third quarter. On U.S. Trauma, you had supply issues in the third quarter. Have those been resolved, and what was the performance of U.S. Trauma in the fourth quarter? My follow-up, my second question is on Extremities. Looks like that did not post in the U.S. double digits. On past calls, you've talked about just the law of big numbers. If you could provide a little bit more color on U.S. Extremities growth. Thanks.
Yeah. Our U.S. Trauma & Extremities grew 7%, keep in mind that we had a double-digit growth comparable in the prior year. I would tell you that the supply problems are largely behind us. The issues that occurred in the third quarter are not completely resolved, largely behind us, that really helped us be able to get back to the kind of growth we were more accustomed to in Trauma & Extremities. Our shoulder business really picked up quite nicely. It's the foot and ankle area that had been growing in the 30% range for the first few years when we really built out that business. That's starting to come down to earth a little bit more in line with the market. I would tell you that Extremities still continues to be one of the most attractive areas within Orthopaedics.
We plan to launch a short-stem shoulder in 2019 that'll continue to drive momentum in an already good performing shoulder business. Keeping in mind that we still have relatively low market share in shoulder, very pleased with the performance overall with Trauma & Extremities and expect another strong year in 2019.
Your next call comes from the line of Larry Keusch with Raymond James. You may proceed.
Oh, thanks. Good afternoon, everyone. Just wanted to circle back on emerging markets. Kevin, you said 6% of sales. Given the investment that you guys have been making over the last several years, where do you think is a reasonable place for you to take that business as a percent of your revenue? Said another way, what sort of gets you happy when you believe you got enough scale there?
Yeah. The average in med tech is roughly 12%, and you have some companies like a Becton Dickinson that's higher than 12%, given the product portfolio they have, and companies like us that are sort of below that average. The challenge that we have is we continue to acquire companies that are largely U.S.-based, whether it's a K2M, whether it's an Invuity, whether it's an Entellus. A lot of the great new technology companies, a NOVADAQ, they tend to be in the United States, and that overweights our U.S. business. I would expect the emerging markets to continue to be, let's call it strong double-digit growers every single year. As long as it does that over time, it'll take on a higher percentage of our business, as long as those acquisitions also start to grow in the emerging markets.
Getting to double digits would be great, but the reality is, as long as we're growing in strong double digits and those businesses are gaining scale and size, that's really more important to me than a magical number that we get to by having the U.S. lower its growth. We're growing close to 8% in the U.S. I don't want that to slow down. That's one way the emerging markets percentage can rise, is if we slow down in the U.S., and that's obviously not in our plans. If we continue to have robust double-digit growth in emerging markets, over time, that 6% will move up, and it should be for a company like ours, more like in the 10%+ range over time.
Okay, perfect. That's clear. Just as a follow-up, you obviously mentioned in your Beds and stretchers business, nice performance in the quarter, and you made the comment that that was really without any new product introductions. I guess the question is, what do you have coming there, in 2019? Do you think that we might be at the beginning point of a replacement cycle? As I understand, I think the last replacement cycle, certainly in MedSurg, was in the 2004, 2005 timeframe.
The replacement cycle is continuous, there isn't sort of one massive replacement cycle. You have hospitals buying other hospitals and wanting to standardize on their equipment. We bring a lot of technology. When we say no meaningful new products, we mean an entire new frame and with all the features. We're constantly updating software or we have new surfaces that we launch. There is always some form of innovation. There wasn't any major platform launch. We're not going to really get into the timing of those launches. Those are things we prefer to wait until those products are actually launched. Suffice to say that we have a really good pipeline within our Medical business, both for the beds, the stretchers, as well as the emergency cots.
Your next call comes from the line of Isaac Ro with Goldman Sachs. You may proceed.
Good afternoon. Thanks for taking the question. Just want to ask another one on Mako. Just putting together some of the commentary here on the call. You referenced that still over 40% of placements are coming from competitive accounts, and that if I look at the numbers, that mix is down a little bit sequentially, but obviously still pretty strong. At the same time, you're talking about opportunities to place additional instruments in existing accounts that have Mako already. If I pull all that together, I'm curious how you think the mix of competitive placements will play out over the next 12 months, 24 months, given the competition there probably gets a little bit thicker.
Yeah, I think we're going to have to wait and see. We've been running pretty consistently north of 40% in competitive accounts. It did jump to over 50% last quarter, but if you look back as we've reported that number each quarter, it's typically hovered between 40% and 50%. I think we're just going to have to wait and see how it plays out with competitive launches. We have been through this before. We feel really comfortable, though, given the number of hospitals available to us, the clinical data we have, the unique features of our robot, that we're going to have the ability to continue to install new robots. What the mix ends up looking like will probably move around, but clearly competitive accounts are going to be part of it.
Yeah, I think the addition of competition to the market is not necessarily a bad thing. If you believe you have a proven system that really delivers terrific value, we would welcome sort of a head-to-head comparison, in some accounts that maybe haven't been open to having that discussion. I think that the entry of other products in the market actually will grow robotics. Robotics, as you saw if you went to AAOS the last two years, it's dramatically changed. The whole dialogue about robotics is everywhere. They're here to stay, and I think more interest in robotics will frankly provide a tailwind in the market and a tailwind for our Mako business.
Great. Kevin, just maybe a follow-up on the earlier comment you made about the source of the upside in the other component of orthopedics. Could you just maybe break down again a little more clearly the biggest reason why that looked a little stronger? If I read you right, the biggest piece was the capital equipment kind of revenue piece was stronger. The reason I ask is I'm curious if that's a trend that you expect to continue this year, that basically the mix of revenue you're getting in that business is on a trajectory that looks sustainable? Thank you.
Yeah. Hi, Isaac, this is Glenn. If you look at Q4, first of all, that is seasonably by far and away the most robust sort of capital cycle selling that we see. What we really saw in that line item, which is primarily made up of Mako and bone cement, was a couple things. Obviously, really robust installs, 54 robots in the quarter, which was significantly higher than prior year quarter. Also, just in terms of the nature of whether or not they were rentals, whether or not they were lease sales through, we just saw a higher rate of sort of the recognizable capital revenue sales than we've seen in prior quarter. That really combined with just positive price. We're also starting to see revenue come off of maintenance contracts as we hit sort of a critical mass that's out in the field.
Lastly, just less erosion from bone cement, which really combined to sort of produce the robust number that you're seeing there.
Your next call comes from the line of Joanne Wuensch with BMO Capital Markets. You may proceed.
Very nice quarter, and thank you for taking the question. Two questions, really. What happens when you get into these competitive accounts with Mako? How sticky, once you are there, becomes utilization of all the other products that Stryker has?
It's pretty sticky, Joanne. We grow by multiple factors faster in the accounts that have a Mako system because, well, first of all, the system's closed, the sales force has the opportunity to go in and sell the entire portfolio, and benefiting from a new hip cup that they can go in and sell, plus our various 3D-printed products around the knee system. It absolutely has that halo effect once we get the robot in there. It's not just selling Triathlon. We see significantly faster growth across our portfolio of recon products in those Mako accounts.
And with AAOS c oming up, can you give us a highlight of what we should be expecting there? Thank you.
Yeah. We'll have the opportunity to meet with the senior management team as we customarily do. We'll also do a booth tour. We're still finalizing, but we anticipate having clearly Mako, so Robert Cohen will be there to answer questions on the robot. Eric, as I mentioned, will be there to talk about the K2M integration and some of the product portfolio. We will also have our new 1688 camera at the booth, so that will be part of the tour, as well as some trauma products. I believe that info is out on the website for folks who want to sign up for the booth tour or attend any of the investor meetings with the senior management team.
Your next call comes to the line of Craig Bijou with Cantor Fitzgerald. You may proceed.
Hi, guys. Thanks for taking the questions. Just to follow up on guidance. It's a little wider than 2018 for both organic growth and EPS. Obviously, FX, the uncertainty around FX impacts the EPS range. Just wanted to see if there's any reason for the wider guidance, perhaps macro concerns, and then maybe just the bigger picture, what are your thoughts on how the macro environment can impact you guys in 2019?
Yeah, we feel really good about the overall macro environment as it currently stands, as Kevin referenced in his comments, and we also feel good about the momentum we have exiting 2018 across the businesses. Just keep in mind, we're a much bigger company, so there's a larger revenue base. We're in more markets. We've done acquisitions, so there's just more variables overall. Typically, we've had a basis point range similar to this year. Overall, I think with the highest guide in a decade, recognizing that things change and we're a big, diverse business, I think it's an appropriate range to start the year at.
Great. That's helpful. Just one follow-up on pricing. Glenn, I appreciate your comments and the expectation for 2019. It is a little bit lower if you look at the midpoint compared to what you guys had in for the full year 2018. Even if you look at Orthopaedics sequentially, pricing decreased significantly in Q4 from Q3. Just thoughts there. Is the environment getting better from a pricing perspective?
Yeah, I think if we think about price, both the performance this year and what we're guiding to next year, a couple things. I think it's less bad than it used to be a year ago. I also think that if you just sort of look at the mix of where we expect growth to come from, obviously MedSurg will be a big grower next year for us, and they are less susceptible to price. The same holds true for some of our international sales. I think given that mix, we probably will see sort of a similar pricing environment, maybe even a little better into 2019.
Your next call comes to the line of Josh Jennings with Cowen. You may proceed.
Hi, good evening. Thanks. I was hoping to start off going back to the operating margin performance in 2018. It sounds like you were able to absorb 50 basis points of acquisition headwinds and with a 40 basis point performance, you really out-achieved or outperformed the top end of the range. Maybe just help us understand what's going better. You laid out the CTG program, I think, in November 2017. You're having stronger than expected expansion in the core business. How much of that outperformance is volume driven, just tagged on to the stronger revenue growth that you experienced and that you generated?
Yeah, I think as you think about that performance and certainly covering the impact of acquisitions, there's a lot of puts and takes that flow through margin. A couple things I will say is, first of all, there's a really disciplined leverage approach that's done by all of our businesses as they think about over-performing their targets and how much they need to drop through, so much so that it's a part of everyone's incentive plan here at Stryker. The second thing I would point to is that these near-term CTG programs, like indirect spend and share services, we're really starting to see some of the benefits come through from those programs, and those benefits are obviously reflecting in the amount of drop-through that we can have.
On the flip side of that, given the amount of acquisitions that we had during the year, those were very dilutive to the op margin, and we push the integration efforts of those as quick as we can, especially sort of on the G&A side of things, so that we can sort of squeeze better op margin performance even out of acquisitions.
Yeah, I would tell you that there's been a noticeable change in the speed of our integration versus even three or four years ago. Obviously, you know the dilution because these are publicly traded companies. You can see how negative they are. The speed of getting those synergies has increased dramatically. K2M is a good example where obviously it'll be pretty heavily dilutive in the first half of the year, and that dilution will start to abate as we drive out those synergies. Speed of integration is a new mantra at Stryker, and that's really taken hold in the last two years.
Great, thanks. Maybe just in front of AAOS, I think some of the debate is going to be new competitive robot for the total knee application coming to market and maybe a launch at AAOS versus Mako and maybe some of the different features, competitive features that you're going to need to defend against. I guess some of the things we understand is the lack of a need for a CT scan, maybe some faster registration and allowing the surgeon to actually do the cutting with their own saw versus the robot making the cuts. Any initial points from a competitive defensive standpoint for Mako versus the ROSA robot? Thanks for taking the questions.
Yeah, we're going to continue to stay focused on the strategy around our robot and executing on the features and benefits that we've talked about, the haptics, the ability to balance the knee, and the clinical data that's continuing to support the outcomes. I think it's valuable that you've got a number of data points that we routinely report on the quarter, whether it's placements, utilization rates, surgeons trained, clinical data that should make it easier to compare those same data points with competitive offerings. I think it validates that robotics is absolutely here to stay in Orthopaedics and is impacting the market. We're not surprised we're seeing competitive responses. We're also in no way changing our strategy because it's clearly been successful, and we think it's the one to stick with as we think about this year and beyond.
Your next call comes from the line of Kristen Stewart with Barclays. You may proceed.
Hey, guys. Thanks for taking my call. Good to see that the floor is still fully intact from an earnings perspective. Wanted to just clarify just on the Sage commentary you had said. I think you had said mid-single digit growth. Was that for the fourth quarter? I assume that's not for the full year.
No, that was for the full year, Kristen. It picked up in the fourth quarter.
Okay.
Yeah.
Okay.
Fourth quarter was double digit. Full year was mid-single digit.
Okay, perfect. How should we just think about that business going forward? Obviously, expect for it to continue to get better from what I'm understanding. Will that kind of evolve back into, I think, it was kind of high single or double-digit growth profile that you had expected at the time of the acquisition?
Yeah. It's great business. The pipeline continues to be really solid. I would expect 2019 to be a better year than 2018. We exited fourth quarter with a ton of momentum. We have a couple of really interesting new products that they'll be launching in 2019. That business should continue to be sort of high single-digit, low double-digit growth for the foreseeable future. Obviously, their remediation efforts were very severe, very significant. In a couple of the product categories, it took us a little longer to get back the business that we had lost during that interruption. They're now starting to hit their stride, and I would expect that to be a reliable and solid contributor to our growth.
Your next call comes from the line of Matthew O'Brien with Piper Jaffray. You may proceed.
Hi, thanks for taking the questions. This is Will on for Matt. I guess my first question would be, if you drill into this ischemic stroke bucket of Neurovascular, wondering what you've seen in terms of a Vecta aspiration system in terms of utilization as a standalone, or if it's being used in combination with retrievers. When that's in full launch, sometime, correct me if I'm wrong, but sometime in the next couple of months, wondering what impact that will have for the broader ischemic portfolio with regards to pull-through and broader hospital contracting?
Yeah. We're in the very early stages of the launch, but it is absolutely one of the factors that we think is going to contribute to strong Neurovascular growth this year. Most of the time, it's used in conjunction with a stentriever because that's really what the clinical data has demonstrated in terms of having the most impact. You do have those surgeons who prefer to go with aspiration only as a first pass. Typically, 40%-60% of the time, you have to go back in with a retriever, we wanted to be able to have an offering for those surgeons who are not currently using a stentriever first. It'll be a mix of the two, but it's too early to tell you with any specificity how much or what the weighting is between the two.
Okay, great. Thank you. Then with your combined spine portfolio now placing you kind of in the top three, four, or five providers, wondering if you could give us any updates with regards to your enabling technology strategy in the near term?
It's still very early. I think the key here right now is with K2M, when we get an immediate product refresh, we get a strong foothold in the deformity market that has a big impact with the thought leaders in this market. We have a much more expanded offering across the board and a larger sales force, and we also have an expanded 3D-printed offering. Longer term, as we've talked about previously, I think this position as well in the out years when we bring a spine robot to market, that's still years off.
Yeah. I would tell you that Eric and the leadership team are evaluating our pre-planning and our navigation. They had their own pre-planning system, as well as looking at robotics. Given that the focus in the short term has been getting the organization sorted, getting the early synergies, having the sales force really mapped, that has been job one. I would tell you in the future quarters, we'll have a better idea on the enabling technologies. Right now, the main focus has been getting the sales force really organized for success.
Your next call comes from the line of Vijay Kumar with Evercore ISI. You may proceed.
Hey, guys. Thanks for taking my question. Congrats on a nice quarter here. Back on the arthro outperformance here in the queue. Did you guys see anything from a comparative perspective with the rain disruption? I think you mentioned bone cement as being in that other bucket as a driver. There was some disruption on the comparative front. Any comments on what drove that outperformance, not just in the other bucket, but even in knees and hips? When you think about the new products like 3D-printed cups coming in for next year, can you put that all, roll it all in on what it means for 2019?
It's one of the factors behind the revenue guide of 6.5%-7.5%. Clearly, we're starting to see the impact of our new 3D-printed hip cup. We've had hundreds of surgeons now exposed to it, including competitive surgeons. I think that's a really strong offering. Knee, that's clearly the Mako effect overall. Bone cement, Glenn's comments were more about the fact that the decline was less significant, although we're still seeing some pressure in our bone cement as we continue to ramp up. We're now well over 30% of our needs are cementless. I think overall, the bulk of it, the market feels relatively similar from a competitive standpoint as it did in the third quarter. I think most of what we're seeing is share gain related.
That's very helpful. Maybe just one on margins here. A lot of concerns on margins, this guide is really strong. I'm curious on M&A dilution. Can you give us a sense on how much of a headwind is it to margins that you guys are eating? It looks like the underlying is coming in really strong.
Yes. When you look at M&A across the board, you really need to focus on some of the bigger ones, especially like K2M. At the gross margin line, it's actually a favorable impact that we'll see. When you move on down to selling and the acceleration that we're doing relative to ramping sales, almost all of them become dilutive in SG&A. This year, for the year and the quarter, we saw 50 basis points of headwind. I'm expecting that headwind will continue at least through the first couple quarters of 2019.
Your next call comes from the line of Matt Taylor with UBS. You may proceed.
Hi, thanks for taking the question. I did want to ask you about your order book. You talked more about it this quarter than I think I've ever heard you talk about it in the past. I was wondering if you could quantify or give us some more color on how that's improved sequentially or over time, and what are the main areas of strength outside of Mako?
It's really across the board with our capital-facing businesses. We're obviously gearing up for the launch at the end of the first quarter of the 1688 camera. We're excited about that. Mako, candidly, we had a really strong quarter, but we also didn't want to convey to people that somehow it was a pull-through of orders that we had anticipated in the first quarter. It was not. It's just across the board. Medical is having really strong growth, and we usually have a pretty good visibility into their order book going out a few quarters. There's no one thing we would highlight. It's just across the board, feels pretty healthy going into the year.
Yeah, even Instruments has a very strong order book. Instruments, if you notice, double-digit growth on top of a comparative year of double-digit growth and a strong order book. Part of the reason we're sharing a little bit more on the order book is we're starting off with a very significant guide, a really strong organic growth guide. To let you know that we have the confidence behind that guide is a strong order book really across the board. Entering the year with very good momentum.
Great. That makes sense. I just wanted to put you slightly on the spot, but I'm curious, as you develop your expertise and your clinical data around Mako, you're gathering a lot of robotics kind of nuggets here as we go along. Do you think that there are other areas that you can bring that expertise to, even outside of hard tissue? Or can you talk about the relative importance of using robotics in a knee procedure versus spine versus extremities?
Yeah. For right now, we've been very clear that our focus is hard tissue robotics, starting with obviously hips and knees. We certainly have the opportunity with shoulder and spine, and we have teams that are working on that. It's early stages and certainly too premature for us to talk about potential launch dates and what that's going to look like. That's our focus. We're not really looking at soft tissue robotics right now. It's really a hard tissue robotic focus.
Your next call comes from the line of Kyle Rose with Canaccord Genuity. You may proceed.
Great. Thank you very much for taking the questions. I reiterate the sentiments on a strong Q4. Kevin, I just wanted to talk quickly from a high level on the portfolio. If I think about some of the recent acquisitions, both NOVADAQ in 2017 and Invuity in 2018, both obviously bring differentiated technologies to leverage across the core business, but they both overlap in an area where Stryker's historically not competed, that being women's health and breast recon. Just maybe in a larger sense, how do you view the portfolio strategy and the vision here as far as the direction that these assets position for the portfolio?
I'll start with Invuity. Within Instruments, it's a pretty broad portfolio of products. What Invuity did was helped us to catalyze a split of that sales force. The surgical unit within Instruments has the power tools. It has the gowns that cover the surgeon. It also has Neptune Waste Management, SurgiCount, and frankly, hard to focus on all of those different call points. Invuity fits beautifully with Neptune Waste Management as well as the SurgiCount procedures in that call point. We created a new specialized sales force called Surgical Technologies, and then Orthopedic Instruments, that includes all the power tools as well as the Steri-Shield products that are really sold in the ortho area. If anything, it helped us drive extra focus and enabled us to specialize our sales force.
That's going to be a catalyst for Instruments to continue what you've seen as a kind of amazing performance over the last decade of very high single or low double-digit growth year after year after year. It's really not something that's a new call point. It actually strengthens a basket of products that we've either invented or acquired in recent history. As to whether we'll get into other areas, that's just something Stryker continually looks at. If we believe that our sales force can bring new technologies to call points, we'll do that. Our biggest asset at Stryker is our sales forces. We know how to run a great offense, and if we can bring them new technologies and continue to specialize the sales forces, we're going to continue to drive high growth.
Great. Just a follow-up on the hip side. I know you talked about the new 3D-printed cup. When we talked about Mako, you talked about 60% of the U.S. procedures still being TKA. I guess I'm just trying to understand, how much of an opportunity is there to really see a Mako effect on the hip side? When you're seeing competitive accounts that you're bringing over with Mako, are you seeing them trialing the 3D in the hip portfolio, or are they really staying more centralized to the knee side?
No, we absolutely see them trialing it, especially it's a great opportunity given the launch of the new Trident II cup out there. We always knew or believed that the biggest driver of the Mako adoption was going to be around the total knee, given the unmet need and patient dissatisfaction rates. We continue to see increases on the hip side as well, and that's part of the benefit of once you get into account and you can sell the totality of the offering and the surgeons start to see some of the benefits. I think knees, given they're 60% of the procedures, will still dominate, but absolutely, we see an impact from hips.
Your next call comes from the line of Ryan Zimmerman with BTIG. You may proceed.
Thanks for squeezing me in, and congrats on the quarter as well. Just one question from me. The European MDR regulation kicks in in 2020, making 2019 more of a transition year. On the surface, it appears quite onerous and just wondering if we should be thinking about any incremental costs potentially from this regulation that's coming in place in Europe, or do you intend to remove any SKUs out of the European markets that maybe don't make sense? Thank you.
Yeah, Ryan, we've actually been working on the registration process related to the new regulations over the course of the past year. Early on in the year, in accordance with our non-GAAP policy, we received approval to remove those costs from our regular earnings and move them to non-GAAP. In terms of the guidance you're getting and the numbers you're seeing, you're really seeing the excess cost, the extra cost removed. Now, you're correct. Any going forward kind of burden that we might have related to the regulations would flow through our regular R&D line item as we up our standards relative to that regulation.
Got it. Thanks for the info, Glenn.
Thanks.
There are no further questions at this time. I will now turn the conference over to Mr. Kevin Lobo for any closing remarks.
Well, thank you all for joining our call. Our conference call for the first quarter 2019 results will be held on April 23rd. Thank you.
Thank you, ladies and gentlemen. This concludes today's conference, and thank you for participating. You may now disconnect.