Welcome to the Q3 2016 Stryker Earnings Call. My name is Crystal, 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. 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 ks 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 3rd quarter earnings call. Joining me today are Glenn Boehnlein, Stryker's CFO and Catherine Owen, VP of Strategy and Investor Relations. For today's call, I will provide opening comments followed by Kathryn with an update on Mako and our November Analyst Meeting. Glenn will then provide additional details regarding our quarterly results before we open the call to Q and A. We achieved another quarter of solid organic sales growth coming in at 6.2% and fueled by a strong showing for both MedSurg and Neurotechnology with both delivering roughly 7% increases.
Orthopedics growth was consistent at approximately 5% organically. On a geographic basis, Q3 sales were balanced with a 6% increase in the U. S. And a 6.7% gain in international, driven by strong momentum in Europe and a return to growth in emerging markets. We are pleased with the performance of our acquisitions, including both Sage and Physio Control, which are well positioned to help us drive stronger organic sales growth for Stryker in the coming years.
A strong top line performance coupled with our ongoing focus on G and A leverage resulted in EPS of $1.39 up 11.2 percent and a $0.01 above the high end of our targeted range. Based on our performance through the 1st 9 months of 2016, are confident in our ability to deliver on our commitments with organic sales growth for the full year expected at 6% to 6.5%. We are narrowing our adjusted EPS range to the upper end, which now stands at $5.75 to $5.80 per share. Overall, we believe the strength of our people, diversified revenue model and new product flow positions us well to continue to deliver sales at the high end of medtech with leverage earnings gains. We look forward to providing our 2017 financial guidance on our Q4 earnings call in January.
With that, I will now turn the call over to Kath.
Thanks, Kevin. My comments on today's call will include an update on Mako as well as a preview of our upcoming analyst meeting. Starting with Mako, results in the quarter were strong with a total of 30 robots quarters, approximately 40% of the installations were in competitive accounts where Stryker has no or relatively low market share. Demand for the Mako robot is being fueled by the expanded indications, including the total knee, which began a limited launch in June. Since that time, we have had KOL surgeons trained on the robot for the total knee, including those with prior robot experience, but with less exposure to our triathlon knee as well as surgeons who had not previously used a robot for joint reconstruction.
As we've discussed previously, by observing both these groups, we are optimizing the training protocol. Of note, since the start of the limited market release for the total knee, over 200 cases have been performed and we have been pleased with the results to date. We are targeting the 2017 AAOS meeting to move into the full commercial launch. I will now shift to the analyst meeting, which will be held on November 9 at our Orthopedics headquarters in New Jersey. In order to optimize the utility of this meeting, we will be focusing the formal part of the meeting on several key areas.
This will include a Mako physician panel with 2 surgeons who have been part of the limited market release. We will also have a Stryker Performance Solutions panel, which will include an SBS customer and focus on how we've been able to deploy expertise in the joint reconstruction episode of care to help reduce our procedural costs. Turning to cost transformation for growth, Lonnie Carpenter, Group President of Global Quality and Operations, will provide an update on the various initiatives within CTG, including the expected financial contribution over the next few years. Glenn Bainline will provide a financial update, including our longer term targets. We will conclude the formal part of the meeting with a Q and A session with the leadership team.
We will then move to the product fair, which will include product highlights from MedSurg and Neurotechnology and will afford the opportunity to interact informally with the broader Stryker leadership team. We hope you will be able to join us for the meeting. The event details and complete agenda, including the various guest speakers and their backgrounds, are available on the event registration site. With that, I will now turn the call over to Glenn.
Thanks, Catherine. Today, I will focus my comments on our Q3 financial results and performance drivers. Our detailed financial results have been provided in today's press release. Our organic sales grew 6.2% in the quarter, which was within our range of full year expectations of 6% to 6.5% with no difference in selling days. Pricing in the quarter was down 1.3% from the prior year, while foreign currency exchange had a nominal impact on sales.
U. S. Sales continue to demonstrate strong momentum with organic growth of 6%, reflecting solid performances across our portfolio, especially in MedSurg and Neurotech. International sales grew 6.7% organically, highlighted by solid gains in Europe, Canada and Australia, somewhat offset by the continued impact of our previously discussed destocking issues in China. We expect that the 4th quarter will show some improvement in our China business as prior year comparables continue to ease.
Our adjusted EPS of $1.39 increased 11.2% from the prior year, reflecting strong sales growth, accretive acquisitions and good operating expense control. Our 3rd quarter EPS was negatively impacted by $0.03 related to transactional foreign currency exchange. Focusing on our segment highlights, Orthopaedics delivered constant currency growth of 5.3% and organic growth of 4.8% led by the U. S. Organic growth of 4.7%.
These gains reflect solid performances in trauma and extremities at 6.9% and knees at 5.1%. This growth reflects strong demand for our 3 d printed products, our foot and ankle portfolio and our Mako platform, which had 30 units installed including 7 outside the U. S. Orthopedics International delivered constant currency growth of 6.3% and organic growth of 5.1% led by our European business. MedSurg posted strong gains across all businesses in the quarter with constant currency growth of 33% and organic gains of 7.3%, which included a 7.7% increase in the U.
S. Instruments, which was up 5.2% in the U. S, maintained good momentum with its waste management business and the newly launched Neptune 3 and continued strong performance related to its navigation business. Endoscopy delivered U. S.
Growth of 10.4%, driven by strong double digit performances of its camera and light source products and strong gains in its communications, sports medicine and ProCare service businesses. Our Medical division had U. S. Organic growth of 6.8% driven by double digit growth of its core bed and PowerCot products. On a comparable basis, Medical's physio business was up 6.3%.
Its Sage business grew 12.5% including the impact of the recent recall. Excluding this, Sage grew 15%. We are pleased with these results and the ongoing integration efforts at Medical. Internationally, MedSurg organic sales growth was 6%, which reflects strong European and Australian sales and some easing of the MedSurg comparable in China. Neurotechnology and spine continues to drive above market performance with constant currency growth of 8.7 percent and organic growth of 6.9%.
This growth reflects continued strong demand for our Neurotech products. U. S. Neurotech posted growth of 9.1% in the quarter highlighted by our AIS products and our neuro powered instruments. Our Spying business in the U.
S. Continued to see some supply issues offset somewhat by strong demand for our 3 d printed interbody titanium products. As I've said last quarter, we expect the supply issues to remain into the Q4. Internationally, Neurotech had constant currency growth of 16.7%. This performance was driven by continued strong demand for our Trevo stent retriever and target coil products in Europe and Asia.
Spine's international growth was 1.6% and was impacted by the aforementioned supply issues and challenges in China. Now I will focus on the operating highlights within the quarter. Our gross margin, which on an adjusted basis was 66.3 percent, was down 60 basis points from the prior year quarter. Gross margin was favorably impacted by absorption and productivity gains, which was offset by mix, including the impact of acquisitions and foreign currency exchange. SG and A for the Q3 was 34.9% of sales on an adjusted basis, which was favorable by 70 basis points as compared to the prior year quarter.
This improvement reflects favorable leverage from continued focus on operating expense improvements through our CTG program, cost containment efforts and business mix including leverage from our recent acquisitions. We continue to invest in internal innovation with R and D, which is up 10 basis points year over year to 6.5% of sales. In total, adjusted operating expenses at 41.4 percent of sales was favorable 60 basis points to the prior year quarter and these results continue to reflect our focus on leverage growth. In summary, our operating margin was 24.9% of sales in Q3, flat year over year, but up 64 basis points on a year to date basis. This performance reflects the positive results from our various CTG programs, continued cost control and favorable accretion from acquisitions, offset by business mix, pricing and foreign exchange.
Lastly, I will provide some highlights on other income and expense. Other expenses increased due to the higher net interest expense related to increased borrowings at the end of the Q1. During the Q3, we also paid down $750,000,000 of debt and accounting for the impact of this, we anticipate our future quarterly run rate of interest expense to be approximately $65,000,000 Our 3rd quarter adjusted effective tax rate of 17.5 percent reflects the benefits of our global tax structure, partially offset by the impact of higher U. S.-based income from our recent acquisitions. Moving on to the balance sheet.
We continue to maintain a strong balance sheet with $3,000,000,000 of cash and marketable securities, of which approximately 80% was held outside the U. S. Total debt on the balance sheet at the end of the second quarter was $6,800,000,000 dollars Turning to cash flow, our year to date cash from operations was approximately $1,200,000,000 Finally, as we have previously announced at the end of Q1, we have suspended our share repurchases for the remainder of 2016. In terms of guidance, we reconfirm our previous full year organic sales growth range of 6% to 6.5% for 2016. If foreign currency exchange rates hold near current levels, we expect a neutral impact in the 4th quarter and a negative foreign currency impact of less than 0.5% for the full year.
Lastly, our guidance for adjusted net earnings per diluted share in 2016 is now expected to be in the range of 5.75 to 5.80 for the full year. And now, I will open up the call for Q and A.
Thank you. We will now begin the question and answer session. And our first question comes from Bob Hopkins from Bank of America. Your line is open.
Hi, Hi, good afternoon. Can you hear me okay?
Hi, Bob. Hi, Bob.
Hey, thanks for taking the question and congrats on a really solid quarter all around. So I have two questions. 1, I'll start with you, Kevin. I was encouraged to hear your comments about emerging markets and turning back to the positive there. So maybe you could just kind of lay out specifically what improved and what you think the prospects are for your emerging market growth now that you've kind of turned a corner.
Can we get back to mid to high single digits in the reasonable timeframe for emerging markets? Just want to hear a little more color on EM.
Yes, sure. So outside of China, I would say I'm really encouraged by the progress in India, which is really a continuation of what we've been experiencing in the past few quarters. Brazil returned to growth. And as you know, Brazil has been a very challenging market for us over the past year to 2. We also had good results in Russia, Turkey.
So it's really across the board. Our other emerging market countries performed very well. China is still a bit of a laggard, but as Glenn mentioned in his prepared remarks, we expect China to return to growth in the Q4. So we're starting to see an improvement. Part of this is really the comparables.
We're sort of lapping the years of sort of core performance. So we would expect a bit of a turnaround. But I it's really early. It's only 1 quarter, but I'm starting to see a trend that we will see growth. Now whether it will get back to double digit as we experienced in prior years is a little early for me to say.
But certainly, the outlook is much more positive than it's been over the past year.
Okay. Thank you. And then for Catherine as a follow-up, just on your comments on the Analyst Day and Mako. On the Analyst Day, can you just I know you're not giving guidance until the Q4, but what will you be quantifying at the Analyst Day in some of these prepared commentary? Will there be any quantification of cost savings or long term margin opportunities?
Just want to make sure I have a good understanding of exactly what we're going to get at the Analyst Day. Thank you.
Yes. In addition to the panels that focus on Mako and SPS, Lonnie will be giving a CTG update, which will include a greater quantification and visibility around the long term potential from the cost savings that we're targeting. And then Glenn will be giving an update with some of our longer term financial targets. Now we'll go into the full detail of that at the Analyst Day. But also to be clear, we won't be giving 2017 guidance ranges, the formalization of our targets until the January 4th quarter call.
Thank you. Our next question comes from Rick Wise from Stifel. Your line is open.
Good afternoon, everybody. Thank you. Maybe I'll also start with Mako. You always had an exceptionally strong quarter. Maybe, Kevin or Catherine, you could give us a little more color there.
Maybe just sort of multipart pressure on this. What kind of pull through are you seeing for Stryker products, particularly in competitive accounts? And maybe talk a little more, if you could, about some of the data surrounding clinical data surrounding Mako we might see. I know that's been a priority for this year. What might we see and when will we see it?
Yes. I think, obviously, the 30 robots placed, we're very pleased with that number of installations. We're also pleased that they are going into roughly 40% into competitive accounts. It's also what is helping drive our knee growth, which we believe is above market and clearly is a big focus for our sales force right now given their excitement around that. We do believe qualitatively we're going to get continue to receive feedback around benefits including alignment, less tissue disruption and ultimately patient satisfaction.
Longer term clinical data on that is going to take a time to collect. We will be countering that, but that's going to be 1, 2, 3 year data and obviously will take that long. I think it will be a great opportunity at the panel at the Analyst Day where we're going to have a surgeon who had no experience with the robot prior to becoming part of the limited market release of the knee as well as a longer term robot user to ask those questions and hear what their experience has been. But with the 200 cases to date, we've been really pleased what we've seen so far and the ability to both get into a competitive account and optimize the training protocol ahead of full commercial launch, which as we said will take place in March at the Academy meeting.
Great. And just to follow-up on Sage and Physio briefly. Maybe just highlight, I know we'll hear more soon, but where are we in terms of integration and costs and sales? Kevin, do you feel like you're on plan? Sage grew a little faster than the Q2.
Physio a tad slower. I assume that's seasonal, but again, any more color there would be welcome. Thank you.
Yes. Thanks, Rick. So first of all, over the full 6 month period, we're really pleased with both companies' performance. They're really in line with our expectations. The integrations are going very well.
As you know, Sage is, what I'll call, a more lighter integration, given that there's less of an overlap with the Call Point. But certainly we're sharing leads with the Sage organization. And physio, we have a little bit more call point overlap. It's really more of a planning phase this year. The sales forces are running independently this year.
And then over the course of the next year or 2, we'll start to integrate those sales forces. But I would say so far so good on integration and we're pleased with the performance and really the outlook for the future.
Thank you. Our next question comes from Mike Weinstein from JPMorgan. Your line is open.
Thank you and congratulations on getting back above that 6% bar. It's nice to see. Catherine, the September healthcare conferences proved a bit trickier this year. And there was a bunch of questions that seem to have come out of them, where people were asking about comments that you guys had made. So maybe I thought this would be a good opportunity to clarify a couple of them.
And Catherine, Kevin chime in here. 2 sets of comments were, Kevin, just about your outlook for the trauma business and the hip businesses and some potential deceleration in growth. And then, naturally, people try to get you to comment on 2017 preliminarily and how to think about operating and financial leverage excluding the impact of the acquisitions and there seem to be some confusion around that. So maybe just want to spend a minute on both the outlook for the trauma and then the hip business in light of all the focus on the knee side. And then just comment, if you would, about how we should think about operating leverage heading into 2017 without obviously giving guidance?
Thanks.
Sure, Mike. I'll take the trauma and hip question and then I'll pass it over to Catherine to talk about, I think, some misperceptions around 2017. So, what I've been saying for some time on the trauma business is that sustaining 15% growth quarter after quarter is pretty unlikely. We've done that for over 3 years coming into this year. If you look at last year's Q3, we grew 15.1% in the U.
S. And so to put up a 7% growth against that comp is still pretty solid performance. But a lot of big numbers is we've been signaling that trauma will start to slow down a little bit in terms of its growth rate, but certainly performing above market. And I think it's still a strong solid performance this quarter. But the only signal there is that sustaining that level of outperformance 3 times the market is not likely to do indefinitely.
So no concerns. We have a very strong trauma leadership team, strong business, strong pipeline. I'm still very bullish about that division. As it relates to hips, we're longer in our product cycle with Accolade II being one of the newer products that we launched a few years ago and a lot of excitement in knees. And as you know, it's the same sales force that sells both hips and knees.
We have a big launch upcoming with Mako Total Knee. We have a lot of cementless products in the knee portfolio. So I would say that there's been a bit of attention focused on knees. And we've seen this in our industry for decades that it's very difficult to be able to focus on both products equally. So the fact that our hip growth, which had been above market for about 3 or 4 years, is now moving, let's say, more in line with market is not also surprising.
Yes. And just going back to some of the misperceptions around some of the conferences, the healthcare in September, I would tell you candidly we were surprised as anybody that there was any misperception. We've tried to be very consistent in terms of our goal of growing sales at the high end of medtech. We think the medtech markets are largely stable, at least the segments where our product portfolio competes. And as Kevin said, in his prepared comments at the start of this call, we feel really good about our ability to continue to deliver that.
The specific range around that, which may have been where some of the misperceptions came, we will talk about in January as we do every year. So to the degree our unwillingness to give guidance ahead of when we normally do it caused some concern. I think that was incorrect. We feel great about the momentum and the product portfolio and we'll look to specify that in terms of financial ranges in January.
Perfect. Catherine, just one follow-up if I can. The growth in Mako this quarter and the units sold or placed, was that to could you just characterize it? Was that to the beta sites that have been doing the, call it, early launch feedback for you guys? Or is that the centers anticipating the launch?
It's both. Some of those are to those that are part of the limited market release, but that's a small group. Some of those who are just, for lack of a better way of putting it, getting in the queue because they want to be part of the upgrades and ready for the total launch. So it's a mix, but it is I would say that limited market release customers are the minority.
Thank you. Our next question comes from David Lewis from Morgan Stanley. Your line is open.
Good afternoon. Just two quick questions, one for Kevin, one for Catherine. Kevin, just you've got a wide range of businesses, not as you're back above 6% organic this quarter. And I agree with Mike, that was nice
to see. I wonder if you could
just comment, just given the broader environment this particular quarter, a couple of things. One, just your capital business is very strong. There's some emerging concern that the election cycle is going to result in some capital freeze or did result in that in the months of September October heading to election cycle. So just the broader capital environment to election, are you seeing any change in sort of relative backlogs? And then utilization, sort of a similar question, a lot of talk about polarization in sort of July, August versus September.
I mean, did you see a change in how utilization trended in some of your orthopedic businesses across the quarter? And then I'd have a quick one for Catherine.
Yes. So thanks, David. What I would tell you is, we haven't seen really any change in the capital business. It's been extremely stable. The election to us is really a nonevent in terms of the businesses that we participate in.
As you know, there's a lot of attention being drawn to pharma. A lot of comments being made about pharma, but medtech is a very small percent of the overall healthcare spend and we're not seeing really any impact whatsoever. And as it relates to procedural volume, again, we didn't see anything unusual within the months of the quarter, very, very stable market and that's not new. The market has been stable for the past 2 years, 3 years and we continue to perform well in this market.
Okay. Thanks, Kevin. I won't ask you who you're voting for. Kevin sorry, Catherine, in terms of back half 'seventeen, you had said Mako is unlikely we see share movement till back half 'seventeen the earliest. I just think about it's the biggest year on year system ad you've had, I think, since you bought the company.
You got 40% competitive accounts and obviously you're going to have a bigger launch at AOS. Is the back half of 'seventeen still the earliest that we could start to see share movement in the knee channel?
I think that's the way to be thinking about it right now. Remember these robots have to get installed that that takes time and energy and people we have to train. And so there's a cadence. This is not like an easy product that you launch overnight and it runs. So we need to be thoughtful in that.
We're very pleased that we can target ACADEMY for the full commercial launch and we'll be well prepared to go out and train from there. But I still think the back half of the year is the best time to be focused on in terms of starting to see indications that we're gaining meaningful knee market share.
Thank you. Our next question comes from Kristen Stewart from Deutsche Bank. Your line is open.
Hey, everybody. Thanks for taking the question. Just to go back, I guess, to some of the comments on the acquisitions. I know you said that integration is going so far. Would you be willing to say in terms of the 2017 accretion numbers that those still look to be intact based upon how the businesses are performing better or worse than you had originally stated?
Yes. Hi, Kristen. It's Glenn. Yes, we actually were on track in 2016 to hit the accretion numbers that we put out there. And then also for 2017, based on our preliminary planning, we think we'll be on track to hit the numbers that we put out for accretion as well.
Okay, great. And then, has FX changed at all in terms of the bottom line impact? And with the change in stock option accounting, can you give us a sense in terms of how that may also impact or maybe what the impact might be in 2016 or 2015 or anything to that extent you could help frame?
Yes. It feels like 2 questions and I'll take a stab at them both. So first off on FX, as you can see translational is easing especially in Q3 and we expect it to be nominal in Q4. Transactional will still continue to impact us, as it did this quarter and it will next quarter. And part of that is related to our hedging program and the way we lock in hedges 18 months ahead of time and how that relates to the current exchange rates that are out there.
And then secondly, as it relates to the change in stock option, I think if you take a look, we've disclosed what we think that will be, which is roughly maybe $30,000,000 and we don't plan on adopting it until next year.
Thank you. Our next question comes from Chris Pasquale from Guggenheim. Your line is open.
Thanks. Congrats on the quarter guys. Kevin, it's been a little while since you guys hosted an analyst meeting talk about some of the progress you've made with some of the investments to get a cost in the middle of the income statement in particular. I see Lonnie is on the agenda. Can you talk a little bit about some of those programs?
You've highlighted the ERP transition, some of the other things that you're doing. And will this be an opportunity to sort of lay out the next steps that how we get it some leverage, particularly in the middle of the income statement going forward?
Hey, Chris. I think what you'll hear Lonnie talk about is progress on multiple fronts as we've gotten the CTG program underway. ERP is one of them, product life cycle management, plant optimization, indirect spend. And as we try to articulate, giving greater quantification around the longer term targets and expected contribution from that. So that will be the focus of his comments, while Glenn will focus on our longer term financial targets beyond 2017.
Okay. Thanks. That's helpful. And then, sorry if I missed this earlier, I've been jumping around, but can you talk a little bit about the trauma and extremities business? Good quarter there, a little bit of a pickup from what we saw last quarter, anything in particular driving that?
No, I would say it's just continued strong performance. We've been performing very well in our trauma business over the last 3 years and it was just more of the same this quarter.
Thank you. Our next question comes from Kayla Crum from William Blair. Your line is open.
Hi, guys. Thanks for taking my questions. Just a couple for me. So in terms of acquisition strategy and I guess specific to Orthopedics and spine, are you guys more focused on scale or growth at this point in time and granted they do come hand in hand, but one tends to lead to the other. So just trying to better understand your M and A strategy there.
There's no change in the M and A strategy, whether it's the company overall or ortho versus med surg or neurotech. It's focused on our core and key adjacent markets. If you look historically, the bulk of our deals have been in core markets with a few key adjacent acquisitions and that will continue to be the strategy going forward across all the divisions. So no change from that. Okay.
And then just a follow-up on the Extremities business. I mean just looking specifically at foot and ankle, can you guys talk about how your foot and ankle performance has been recently? Is it still sort of trending at historical levels? And just any commentary on market trends there would be helpful.
Yes. So we're really pleased with our Foot and Ankle performance in the U. S. This quarter we grew 15%, very much in line with the performance we've had over the past year. It continues to be a very good market.
Thank you. Our next question comes from Glenn Novarro from RBC Capital. Your line is open.
Hi, thanks guys. Two questions. First, pricing in orthopedics down 2.2%, that was similar to the 2nd quarter. So I'm wondering if the new trend line for orthopedic pricing is now going to be in that 2% to 2.5% range? And then I had another follow-up on pricing.
I think we feel comfortable from a total company perspective that pricing is going to be down in that 1.5%, 2% vicinity. It's been trending slightly less negative. Ortho, it seems relatively stable, but candidly trying to predict that level of accuracy, 50, 100 basis points moves in prices is really difficult. We have greater confidence and visibility when you look at the totality of the company because we have areas with less price less pricing pressure. And so we really try to focus on the total versus a specific line item where it can move around quarter to quarter.
Okay. And just as a follow-up to that, pricing, again, I look at it sequentially pretty stable. And now we're in the 6 months of CJR. So it seems like there's been no impact to pricing. So I'm curious as to what your thoughts are on the implementation of CJR?
And are you seeing any pricing pressures? Thank you.
We would agree that we really haven't seen an impact, but in fairness too, it has only been 6 months and in the 1st year there is no financial penalty. So we really believe you're going to see a greater focus by hospitals when there's more of a financial incentive as you go into 2017. I think you'll be able to get a lot better visibility or hopefully will at the Analyst Day because we will have a hospital customer who has experience under the bundle payment, but we continue to believe their focus is going to be in the post acute setting on rehab costs since there is tremendous value to be realized by shifting more patients to the home and out of some of the skilled nursing facilities and other rehab facilities.
Thank you. Our next question comes from Matt Miksic from UBS. Your line is open.
Hi, thanks for taking our questions. So I had one kind of topical question coming out of NASS and your demonstration of titanium and your preprinted products? And I had one follow-up just on the ortho side, if I could. So one of the things you talked about in your presentation and Q and A afterwards there was just the build out you've put in place around 3 d printed products in general. Of course, that drives the spine portfolio of really one key product at the moment, but also your press fit knee, cementless knee, tibia platform you've talked a lot about.
So I'm wondering, as you build that out, I mean, just given the proportion of your business, given the performance of your business, how are you prioritizing, I guess? Are you getting leverage across those two platforms in the way you manufacture? And how are you sort of thinking about which one of these sort of high demand products gets the volume over time? And I have more follow-up.
Sure, Matt. The short answer is they all do, but we have been capacity constrained. We are adding 3 d printing capacity on a monthly basis. We broke ground on a dedicated 3 d printing facility in Ireland last year. As you know, this is extremely highly technical and with a great deal of know how around 3 d printing these type of metals.
And we will be launching additional 3 d printed products and but you should assume you'll see the benefit of that in spine as well as on our revision and press fit knee portfolio.
Okay. And then the follow-up just on the trends in orthopedics. I mean the knee number in the U. S. In particular, I thought was quite strong going up against a pretty significantly tougher comp.
Hip is kind of the same. So just in terms of trends there, I think we talked about back in September, What should we expect in terms of recovery in hips or annualizing some of the launches that you've had in hips? And then on knees, if you could is it the press fit that's really making up the difference in driving are we getting a mix benefit, penetration benefit on the knee side that's driving that strength? Appreciate it.
Yes. So keep in mind, it's the same sales force and the same customer base on hips and knees. Accolade, which has been a terrific product launch for us is several years into that now, whereas Mako is getting an enormous amount of focus and is a huge product launch. And as a result, the sales force has focused on that. So there is a halo effect that's helping our knee business.
We also have additional new products on the knee side of our 3 d printed revision cones and sleeves. And as we just mentioned, our 3 d printed cementless knee which is really driving us to now low double digit penetration for cementless knees which is well above the industry. So I think right now you're just in a period where there's a happening on the knee side and a lot will continue to happen as we go to full commercial launch. We will be introducing more hip products, but sales force likes to focus on what's new and hot and clearly a lot of that momentum right now is on the knee side. So we think hips probably more like overall market growth.
Knees, we believe we're going to continue to grow above the market.
But certainly, when you look at the overall, we're very pleased with our performance. Our sales teams are doing a really excellent job and we're excited about the future years.
Thank you. Our next question comes from Mike Matson from Needham and Company. Your line is open.
Hi, thanks for taking my questions. We've seen a real pickup in the amount of M and A in the spine space. And Kevin, last I heard, I think you were saying that you were happy with the performance of the spine business and the turnaround there. I mean, you didn't really feel the need to do something from an acquisition standpoint in spine, but I just wanted to check-in and see if that was still how you felt?
Yes. So as you look at our spine business, you see that we've had some issues around product performances, supply chain disruptions, but we have a great leadership team and we had a number of quarters of very strong growth. And I believe in this leadership team and Tritium is a great example of the 3 d printed interbody device, which performing very well. I'm confident our team can continue to perform well and grow the business. Relating to M and A, I would give you the same comment I give for all our divisions.
We're always looking to strengthen our businesses, but we're not going to comment on whether we're going to do acquisitions, big or small, on any of our divisions.
Okay. I understand. And then you do have a significant portion of cash of your cash outside the U. S. So I know there's some talk of a potential tax deal after the election.
So if that were to occur, obviously, it would depend on the terms of that. But would you repatriate any of that cash? And if you did, what would you how would you prioritize the use of that cash?
As we look at our cash, I'm sure we're in the same position as several other U. S. Companies. And if something like that became available, as it did a few years back, we would definitely take advantage of it and repatriate our cash to the extent possible. In terms of how we might prioritize that cash, it's hard to say at this point.
We've said before about what our priorities are around capital allocation and that would mean M and A, that would mean dividends and it may mean share buybacks. But commenting beyond that, I don't think I can do that at this point in time.
Thank you. Our next question comes from Bruce Nudell from SunTrust. Your line is open.
Good
Kevin, I have a couple for you. Firstly, I'm fascinated by this 40% placement of Mako at competitive accounts. One of the big issues with orthopedics is that there's tremendous brand standardization upon on the part of surgeons as well as institutions for hips or knees. So how do you accomplish that where you put a robot in and get people to go beyond unis and kind of standardize on knees with a Stryker brand that they may not use most of the time today?
The way we look at our Mako adoption is really around behavioral segmentation, which surgeons like new technology and believe that they can become better in delivering value to their patients with technology. And so it's not about whether they like Stryker or whether they like Zimmer or whether they like J and J, it's about do they like robotics and do they believe in robotics. And that's why it's not surprising that many of the placements are in competitive shops. We're getting a little feedback. Can you hear me, Bruce?
Yes, I can.
I'm sorry, we're getting a little feedback in the room. But, so what I'd tell you on this front is that's really all about the surgeon who wants to become better and who believes in technology, less so about our specific relationships or whether the hospital is with Stryker or a different account. It's a different niche that we're serving. If you look at Mako prior to our acquisition, they were able to obtain about 18% of the uni market over a 4 year period. They were not a proven entity.
They weren't even an orthopedic company. So we really believe this is about technology adoption certainly in the 1st couple of years. It's really around behavior, surgeons believe in technology and we're going to go to the surgeons that believe in it. There are many skeptics as you know with all disruptive technology And some of those skeptics are Stryker loyal surgeons. And they won't be the first to adopt.
And that doesn't concern us because there are many surgeons who are interested and who will be willing to adopt.
Adopt. And my second question, thank you for that, is, as we were relaunching on Stryker, what really struck me was that despite acquisitive nature of the company, ROIC has been maintained. And could you just and it seems to be like a core strength of the company. Could you talk about how that influences the profile of what you buy, how it fits in? And is that a formula you can maintain going
forward? It's long been our history to be very disciplined in our deployment of capital. So when we look at deals, we want to strengthen every division that we have in the company. But we won't just pay whatever for companies. We're very disciplined.
We walk away when the prices are above our ability to deliver value. And sometimes there's assets that we like and the price point is just too high and we have discipline to walk away from deals. And I think that's why you see the ROIC so consistent year over year over year in spite of the acquisition nature. Also the ability to have acquisitions that fit in our existing business that plug into our sales force, which is the bulk of the deals we do. We have a proven model to deliver value with those types of acquisitions.
So I think it's a combination of playing to our strengths in terms of our commercial execution and being financially disciplined with the deals that we do make.
Thank you. Our next question comes from Richard Newitter from Leerink Partners. Your line is open.
Hi, thanks for taking the questions. I want to maybe for you Kevin to start off where at NASS obviously is topical. We're seeing a lot of robotics take a bigger presence on the floor. Being that you were the 1st major company to kind of really validate the robotics category, I would love to hear what your view is of the robotics kind of push in spine we're starting to see and how Mako potentially fits in over the long run?
Well, we love the fact that robotics is taking up a lot of the discussion because as you know with Mako, we believe in robotics. Right now, at Stryker, our focus is on hips and knees and specifically the total knee launch. But we see over time that certainly robotics will extend into other procedural areas, including spine. We do have a small R and D effort underway right now, but it's too early for us to speculate on when we would come to the market in that specialty.
Okay, thanks. And then maybe just one more follow-up. Outpatient surgery and the trend to outpatient and ambulatory surgery care, it's clearly where hospitals are trying to go. I'd love to just hear how you feel Stryker is positioned either through technology or other means to capitalize on that trend? And specifically, if you could talk to whether or not Mako is lending a hand in that effort?
Thanks.
We have a lot of experience with the ambulatory surgery center with our sports medicine business. And as you know, spine, a number of procedures, the more simple procedures are starting to move into the ambulatory surgery center. At this stage, Mako hasn't had a big impact, but we do see robotics is going to have a play in all of the different aspects of the care continuum. I think this trend will continue towards the shift of site of care towards surgery centers will continue, but it's not something we're not unprepared for. We have plans across our divisions.
And as you saw, if you were at NASH, you saw the spine division has actually created a program that's very specific
for the surgery center.
Thank you. Our next question comes from Larry Biegelsen from Wells Fargo. Your line is open.
Hey, good afternoon. Thanks for taking the question. So I wanted to just start by focusing on the very effective U. S. Which was still good to see growth that will get slowly
Larry, I apologize, we can't hear you.
If you're on a speaker, could you pick up please?
Sorry about that. Can you hear me okay?
Yes, much better. Thank you.
Sorry. Neurotech, that was a little slower in the U. S. This quarter. What drove the deceleration?
And could you talk a little bit about how your ischemic stroke business is performing? I know you've talked about that as a key growth driver for you guys. Thanks.
Yes. So we continue to see good momentum in the AIS market. As we talked about before, predicting the slope and the speed of that market adoption is tricky. So we'll move around quarter to quarter and AIS was a bit slower sequentially although still healthy growth in that segment. We did have a coil recall in the quarter, which impacted our hemorrhagic business that's fully resolved and shouldn't impact going forward.
All right, guys. Thanks for taking the question.
Thank you. Our next question comes from Matthew O'Brien from Piper Jaffray. Your line is open.
Afternoon. Thanks for taking the questions. Hopefully, you can hear me okay. Just wanted to start with Mako and continue to focus on this a little bit more. But first of all, did you fully sell all 13 additional systems this quarter Q3 of last year.
And the reason I ask that question is if you back that out, assuming you sold it all, it would seem like your core knee business was a little bit softer than one of your competitors reported this quarter and then on a 2 year stack basis is a little bit soft as well. So is there a risk as your sales force focuses on Mako that we could see kind of the traditional knee business soften a little bit along with the hip business as well?
We continue to sell all of our robots, just to be clear. And we report our robot sales in the other orthopedic category, which you can see is up quite a bit. The other items that are shown in that other category includes bone cement and bone cement was down in the quarter, both in the U. S. And internationally.
We used to have a lot more stocking orders for bone cement and now our hospital customers are sort of buying it as they need it. And so bone cement does tend to be volatile from quarter to quarter. But when you look at our knee number, those are implants that you're seeing in the knee number, no robot sales.
Got it.
Thanks for that clarification. And I'm also going off a memory on this one too, which is obviously scary given the first question I just had. But it looks like I think VIZIO grew about 9% pro form a last quarter and it grew about 6% this quarter. Obviously, we don't have the comparables to look at. But is there anything that's going on that's maybe slowing a little bit as you integrate that asset?
Or is it just more a, hey, we had a tougher comp this time last year?
I wouldn't read anything into that. Remember, it's a capital business. It tends to move around quarter to quarter. And so the there wasn't anything unique relative Q2 to Q3. We're very pleased with that integration so far recognizing as early as Kevin commented on.
But you will see capital move around and we tend to try and focus on multi quarter rolling trends to really get a good sense with that business, but nothing to call out.
Thank you. Our next question comes from Matt Taylor from Barclays. Your line is open.
Hi, this is actually Ian Mahmud in for Matt. Can you hear me okay?
Yes, we can.
Okay, great. So there's been a lot of discussion on spine during this call, but I wanted to sort of explore it a little more and just ask about what you're seeing in terms of competition. I mean, we've heard a lot about redoubled efforts to focus on that area from some of your competitors. So just wanted to see if you're seeing anything different there? Any commentary to highlight?
There's nothing we would uniquely call out. It remains a highly competitive market with a lot of players across the board of the larger more established companies and obviously the smaller ones. But there's nothing that we're seeing different with respect to any of the key competitors in the market at this time.
Got you. Okay. All right. Thank you.
Thank you. Thank you. And our
next question comes from Jeff Johnson from Baird. Your line is open.
Yes. Thank you. Good afternoon. Most of my questions have been answered, but Glenn, maybe I missed it, but did you talk about any of the drivers in gross margin between maybe price, currency or product or geographic mix, just kind of big buckets kind of what drove the change in gross margin this year or this quarter? And then as I think about some of the movements we've seen on the yen on some emerging market currencies here recently and given the 18 month hedging program, just any very high level comments you can make about how we think of just the currency hedge portion settling out in cost of goods, how that impacts over the next several quarters?
Sure. I think if you look quarter to quarter, Q3 to Q4, our margin is fairly consistent. And I've talked about this before, there's like you mentioned, there's lots of variables that impact our margin, not only price, but FX, acquisitions. And certainly, one of the biggest factors is mix and the mix plays out in 2 ways. It plays out in sort of geographic mix, but also sort of business and product mix.
And so as I look year over year for at Q3, really probably the biggest impact that we had was related to business mix in terms of how much MedSurg versus Orthopedics versus International hedging program back when foreign currency was a lot more volatile and the whole idea was to lock in the predictability of foreign currency for us. So like you had mentioned, currencies move up and down. Our hedging program provides stability and predictability to us. And so for the Q3, I think as I said, there'll be a sort of a nominal impact on sales related to translational, but that will have potentially a minor impact similar to this quarter related to transactional FX. And that's where I think we'll come out.
And over the next 3, 4 quarters, just, will the currency side alone and we can make our own assumptions than on everything else, but with currency, should we be thinking of that as a small drag still for the next several quarters on gross margins? Is that a fair comment?
Yes. I don't know. I wish I had the currency crystal ball to figure out what how things were going to flow. But it's hard to say because it's not only impacted by say what we've done in hedging, but what the underlying transactions are. So I don't think I can really comment that far out at this point.
Thank you. And there are no further questions at this time. I will now turn the conference over to Mr. Kevin Lobo for any closing remarks.
Thank you all for joining our call. Our conference call for the Q4 2016 results will be held on January 24, 2017. Thank you.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.