This afternoon, we have Glenn Boehnlein, CFO, and Jason Beach, who heads investor relations. I'm Vijay Kumar, cover of MedTech and Life Sciences at Evercore. Glenn, Jason, thanks for taking the time. So, you guys had a pretty pretty bullish Analyst Day. Year-to-date trends have been really strong. We have to start with the customary macro utilization question. So far, macro utilization trends, have they been playing out as per plan? Any changes in the macro environment?
Yeah, I think, thanks for that. You're right, we were very excited about getting to tell our story at Analyst Day, at least for those of you that might have been able to attend. You know, exiting Q3, moving into Q4, and thinking about 2024 as we look at some of the macro trends that we're seeing, you know, first of all, we really are feeling that procedural tailwind in orthopedics. We don't anticipate that slowing down. We fully expect it to continue into 2024, both on the hip and knee side. I would also say that for Stryker, we're also feeling the uplift that we're getting, say, from just our Mako footprint now that's out in the market, as well as our new hip stem, and so Insignia.
Both of those have been real lifts for both those sides of the businesses. You know, flipping to our MedSurg side in terms of macro trends, you know, if you think about backlog as a good barometer for us of the customer order situation that we have, and I would tell you that, we basically are at the same level of backlog that we've been at all year, which means that as we ship product, in any one given month, we're taking in the same amount or even greater number of orders.
And so that, you know, first of all, it gives us really good insight into what are the buying patterns of our customers, how are our customers thinking about 2024, 'cause a lot of that backlog goes into 2024, and all those things look positive. I mean, I think on the, you know, the couple, sort of, if I'm sort of picking apart nits at the edge here, you know, there are still supply chain just hot spots. I feel like we're through most of that, but there are, you know, flare-ups that happen here and there. I think staffing has stabilized for our customers, so they are operating in sort of their new given staffing levels and are maximizing their procedures based on those staffing levels.
Overall, we feel, you know, we feel really good heading into next year.
Fantastic. You did bring up our backlog on the MedSurg side. I think CapEx comes up, Glenn, and it's been a little confusing because some of your peers have cited challenges by customers in a tight rate environment. Is Stryker gaining share? Is that what Stryker is seeing, or have you heard anything from your customers about the capital environment as they're contemplating fiscal 2024?
Yeah, I mean, you know, first of all, don't let me give you the wrong impression. It's not that it's not competitive, and it's not that our customers aren't being mindful about how they spend their capital, and these capital analysis committees, and things like that, still all exist, and so I think those procedures are still there. I think a couple things, you know, first of all, we have two kinds of capital. We have sort of big capital: beds, stretchers, booms, lights, tables, and we have smaller OR related capital that really ties directly to revenue streams for the hospitals. You know, on the big capital side, those processes are, are largely the way they have been. There are trials. Bigger capital can, can often be tied to OR remodels or even ASC new builds.
We still see that fairly robust. We have a good backlog there. I would tell you that the timelines are more elongated there, maybe than they usually have been, but we still have a very healthy backlog. I would say on the smaller capital, think about endo cameras, System 9. For that type of capital, it's still a very robust order environment, and I think to the extent customers need that capital because they've either put off purchases during the pandemic, and this is capital that depreciates fairly rapidly because it's utilized so heavily, they're on replacement cycles. And then you combine that with the new releases that we've had of those products, and I think we're in a good position to, you know, certainly capture market share, and drive really good growth.
Gotcha. And just looking at some near-term numbers, Glenn, your Q4 guidance, I think, implies maybe teen sort of sequential step up from third quarter levels. Historically, you guys have done mid- to high-teens, so wondering if there was something that got pulled forward into 3Q, any seasonality impact here when you look at Q4?
Yeah. First of all, we don't necessarily guide quarter to quarter, but you know, I assume you're very pleased with our full year guide.
Fantastic.
And so yeah, you can back into what the quarter needs to be. I think part of that is we're up against a very tough comparable in the fourth quarter last year, and that maybe drives still a very, very healthy number and a healthy volume increase, but maybe somewhat of a suppressed growth number just because of that comparable. I mean, I don't see any indicators, say, quarter-over-quarter, where there's any deceleration across any of our businesses.
Gotcha. Fantastic. And then maybe the up, you know, sticking onto this macro theme, with the war, you know, any, any impact from geopolitical tensions here for Stryker business?
You know, fortunately, the two areas that are sort of hot spots, we did not have business in Ukraine to begin with, so that necessarily hasn't been an issue for us. We do have manufacturing in Israel, but it's well north of where everything's happening, and we don't foresee a disruption in that area as well. And then beyond that, we really haven't seen too much. Obviously, we're complying with some of the restrictions relative to what you can sell in Russia, but none of those businesses also are of a magnitude where they're gonna be meaningful to our overall results.
Gotcha. And then, you know, sticking on to the international regions here, Glenn, China VBP is another one that comes up. What was the impact to Stryker in fiscal 2023? Any impact for fiscal 2024 from new VBPs?
Yeah, I mean, keep in mind, China is roughly 2% of Stryker sales, so again, not a very meaningful number in the totality. We did have an impact from VBP, especially on the orthopedic side of our businesses, but that is largely absorbed now and behind us, so year-over-year comparables are sitting with the VBP impact in. You know, there continues to be neurovascular VBP tender issues that are coming up, and so there probably will be some impact to neurovascular next year. But again, just given the magnitude of the overall materiality of China, for overall Stryker, I don't think it'll be something that would hit your radar screen.
Gotcha. And, and I'm assuming within the 2% neurovascular in China is very, very minuscule. The majority is recon?
Nah, I would say, I would say neurovascular. I don't know, that we probably haven't disclosed this, but neurovascular is bigger than recon-
Okay
... in China.
Okay, that's helpful.
Even, even post-VBP.
And the elongation of timelines for large capital, Glenn, remind me, large capital, I think, was what? 8-9% of Stryker revenues.
Mm-hmm.
This elongation, is that for new projects, you know, new wing, you know, build-outs of new facilities? Is that where the delay is happening, or...?
You know, a lot of it is on the customer side. So if it is new facilities, there still is sort of supply disruptions in the construction industry, and so we're beholden to time frames that our customers have relative to when they want to take our equipment. I mean, the good news is they're coming to us with the order. We're taking that order off the street, so the question is, just becomes: When do we deliver on it? And it's more on their time schedule than ours.
Gotcha. Then one more big-picture macro question before we get onto the good part on new products. GLP-1, obviously, at the Analyst Day, you did highlight, you had a panel. Thought it was helpful, but it also looks like you guys did some internal analysis. Anything that you would like to share on what kind of analysis you guys did, or why, you know, Stryker feels so confident this shouldn't be an issue?
Yeah, for our part, we haven't done anything formal that we've published, but we will talk about, you know, we essentially went to almost all of our KOLs to get their opinion on, you know, how is this going to impact their business? What were they seeing sort of in their own practices or even hearing from customers? And, you know, that really helped us form our opinion that first of all, in the short term, these drugs actually bring more patients into the funnel. There are a lot of patients that are not qualified for hip or knee procedures because of weight issues, so if they can lose 20 or 30 pounds, that actually brings them into the funnel, that they can be future patients.
I think over the longer term, you know, the opinion is osteoarthritis is, is much more impacted by activity than weight, and so, you know, if you make these patients more active, we think that it probably at least is at a neutral place in terms of what, what might be the long-term impact for our business. And there are lots of other factors relative to side effects of these drugs, the cost of these drugs. There's a lot of things that play into this. So right now, for short term, we, we actually think it's a little bit of a slight tailwind.
Gotcha. But, just to be clear, the Analyst Day, sort of the, the framework you laid out, that's not assuming any tailwind from GLP-1, right?
No.
Yeah. And I think at the Analyst Day, you said, large joint end markets should CAGR at mid-singles. I think that's slightly above sort of the general perception, recon being, like, low singles CAGR. What changed? Why is it mid-singles? Is that because of robotics? Is that because of backlog?
Yeah, I think, so our time frame is through 2026, as we look at that in the report that we put out, and we think a couple things. This procedural backlog is gonna drive sort of higher than historical normal growth. We also think that robotics. It's gonna start to have an impact just given the magnitude of the footprint, and then honestly, just demographics. If you just look at populations as a whole, you're gonna see a lot more people getting of the age that they're gonna start sort of looking at these procedures. And then the last thing that's happening in demographics is that we're seeing younger patients come into these procedures a lot sooner than they had in the past decade.
Gotcha. I know in the past, you've given an installed base. Any update on how large the installed base? It looks like Mako is gonna be more significant, and that seems to be tied to utilization and your installed base. Has something changed?
I'll let Jason do this one because-
Yeah. So for competitive reasons, we don't disclose number of robots. We'll certainly give you a better update in January in terms of utilization and those types of things, to give you a sense of how Mako's performing. But, you know, even if you use Q3 as an example, both in the U.S. and outside of the U.S., installs were quite good in the third quarter. You know, if you look outside of the U.S., obviously Mako outside of the U.S. got a little bit of a later start, as you think about regulatory timelines and some of those things, but, great momentum outside of the U.S. as well. So like I said, we'll give you a little bit more color in January, but we will kinda steer away from install base.
Gotcha. Any sense on what the utilization growth on Mako has been, Jason, over the past few years?
Well, I mean, you probably heard us disclose at Investor Day, right? We got, call it 60% of our knees done on a Mako and 30% on hips. So that continues to grow, and we think that's a really good indicator of kinda Mako momentum. So, while we haven't necessarily disclosed every year in terms of that, it's certainly trended positively over the last several years.
Gotcha.
Yeah, and the one thing I would just add to what Jason said is, you know, we've, we, we initially had this heavily focus on getting placements out in the market to customers. You know, our focus now is not only on placements, but also driving utilization. And that utilization just, you know, once we can get a group of doctors that wanna do the procedures on the robot, you know, they typically wanna repeat that over and over, and over again. And so, as you think about robots and some of the factors that might be important, placements are important, but more and more as the market matures, it's utilization. Are they actually using the robot?
Do you have a way to track that in real time, Glenn, on utilization and how the system-
You mean, do I press a button, and I can see it comes up on my computer?
Yeah.
Yeah. No, I don't. But, we do track it, and it's compiled monthly.
Gotcha. Gotcha. I the only reason I bring that up is, you mentioned 60% of your knees are done robotic, and I'm assuming the market's sub 20%, right? Being robotic. And is as you hit that 60%, is this now where we're looking at incremental share gains from the market? Like, why can't the market be at 60% robotic?
Yeah, look, I think we've said, right, as you think about where percentage in knees done on Mako could go, I mean, there's still plenty of room here, right? As you think about robotics, I think more and more it's becoming kinda the price of admission, right? Not just in the U.S., but as you start to go outside of the U.S. So we think there's plenty of runway here for both hips and knees, actually.
Gotcha. And you did give us a cumulative number for robotic procedures at over 1 million being done in Mako. Do we have a sense, like how many of those were knees versus hip?
Yeah, we did not split that out or disclose it, but, you know, just if you think about the initial momentum with knees versus hip, I mean, obviously, it's gonna be significantly more from a knee standpoint. But yeah, we didn't break it out between the two.
When I, you know, use the knee analogy, right, when a robotic penetration of knee took off, Stryker knees outgrew the market, I think almost like 2x. Should we expect something similar like that for hips, just given the traction, early momentum we're seeing here?
Yeah, I think you probably won't see that exact mirror. I mean, knees was ripe, right? Because knees were inconsistent. Not everybody could do a knee the same way, and this gave you a platform that really drove operational consistency and a more sort of data-driven procedure.
I think with hips, you know, there's a lot of satisfied patients that have had manual hips, so there still is a lot of doctors who, you know, feel like: "Hey, I can accomplish this, this procedure." I do think to the extent we have placed a robot, what we're finding is that a lot of these docs that do knees are like: "Well, I'm gonna give it a try doing hips." And if you look at the complement with our new Insignia Hip and sort of the software that we have on Mako, it works really well. So I do think we will drive more hip utilization, but I don't think it will reach the point where knees is.
Gotcha. Then, maybe perhaps pivoting a bit from recon. When you look at, what's exciting, what's in the pipeline, clearly spine, shoulder, you know, that seems pretty exciting. I think it seems like your language around the spine application has changed recently. Certainly at the Analyst Day, it did feel like it seems like you certainly feel like your offering will be differentiated. Maybe just highlight on what does, why, why Stryker won't be a me-too follower. What is differentiated about your, spine offering?
Yeah, I think, and the big thing for us is, you know, maybe not just the end effector for spine that will be added to a Mako robot, but it's also the ecosystem that we're setting up. And, you know, Kevin's alluded to it, there are other products that are under development that will launch with that application, that just, you know, between those sort of front-end products, the spine product, navigation, and all of those together, will just create a differentiating factor for the procedure. So we're super excited about it, end of next year.
What is your expectation for adoption within spine, right? Should this be more similar to knees, or should this look more like hips?
That's a good question. Well, here are my expectations. I, I think it puts us on a level playing field from a competitive market standpoint, which is, which is something we need. Secondly, I think we have a slight leg up because we are talking about an end effector that can be attached to an existing Mako installation. So the barriers for a customer to maybe want to trial this are, are pretty low, especially for the ones that already have a Mako. So using that as a platform to launch, I think will give us a lot of tailwind in terms of when we do go out. Am I gonna go on record with quoting, will it be a hip or a knee or a hip thing? I, yeah, I don't think I'm gonna be ready to say that yet.
But the value proposition here is, it's pretty clear, right? In a navigation, I think in spine tends to be challenging, so there clearly should be some advantages.
Yeah, no, we're very excited about it. We've also previewed it at NASS with some select surgeons, and so, there is a lot of energy around it.
On the shoulder side, like, what, what's the value proposition in shoulder, Glenn?
Yeah, I mean, first of all, shoulder is a really complex procedure. You know, there's lots of soft tissue. There's a lot of customers that have a shoulder procedure that are not necessarily satisfied. The recovery period is very long, you know, sometimes up to nine months to recover from a shoulder operation. I think what robotics will bring to the shoulder procedure, again, a little bit more precision about how cuts are made. Robotics can also avoid, you know, certain soft tissue anatomy in a way that manual just can't, and allow sort of this preciseness of cuts, preservation of soft tissue. And all of those things, if you look at even other joint procedures or even manual shoulder procedures, those contribute to a better experience for the patient and a better outcome for the patient.
So I do think shoulder. The other thing I would just add to that is, it's a complex procedure. Anyone who's getting a shoulder should absolutely go to someone who is just doing shoulders nonstop, because of that. So then if you look at, like, community hospitals or smaller hospitals that offer the procedure, it maybe levels the playing field a little bit for how they can execute that procedure for docs that aren't necessarily doing it, you know, day in and day out.
Gotcha. Yeah, clearly it feels like shoulder should also be right in the Mako wheelhouse, just given it's complex and there is a clear value proposition.
Yeah, we're, it's, you know, when we bought Mako, it clearly was something that was on the roadmap. And then you know, you fold in Wright Medical, and given our upper extremities position now, it makes a lot of sense for us.
Gotcha. And once you have these applications, fair to assume, like, those growth within spine and shoulder should be about markets, about end market growth, Stryker should be gaining share in those markets?
Yeah, I mean, I would argue in shoulder, we're already gaining share, currently, but as I said, in spine, it levels the playing field. And yeah, the expectation would be that we can gain market share.
Fantastic. Then now, you know, switching over to the big, 3, new products, 1788, System 9, and, and, LIFEPAK. 1788, let's start with, with that. And it's already been launched. Looks like it's been off to a pretty robust start. Where are we in the adoption cycle? I think in the past you've said it, it's a 2-year cycle. Just given the robustness of the cycle, is that now getting pulled forward into 1 year, or is that still a 2-year cycle?
No, there's lots of runway to go on 1788. I would say, you know, starting when we did for 1788 really allows us to jump in and perfect our trialing. It also helps us designate which customers we wanna go to first. Believe me, customers have been in the order pipeline for probably six months now, relative to wanting to trial and see the 1788. For those customers that are on calendar year ends, it helps them put it into their budget for next year, which is helpful. So I do think 1788 also is maybe a step up in terms of technology, and that's differentiated from, say, a 1688 launch. So I do think that there's a lot of excitement from customers in terms of what 1788 brings to market.
And, you know, with that, with really big technology like that, we'll gain price, we'll gain market share, and they'll, there'll be really good momentum. And then, you know, same thing with System 9. It's been out already, but really with System 9, the sweet spot is year 2 and year 3. And so, you know, same thing, you know, the numbers for System 9 look really good so far. They should be very good next year and the year beyond that. And frankly, if you think about these products, the more market adoption we see and the more they get out in the market, then we get a little bit of a halo and a buzz because docs talk, nurses talk, clinicians talk, and it just drives really good momentum for those products.
So LIFEPAK is a bit of a different launch for us. First of all, we haven't had a new LIFEPAK in 15 years, so this will be a big deal. I think Kevin talked about at the analyst meeting, this is sort of the professional grade LIFEPAK. It's the one that's in the back of ambulance, it's the one that's in emergency rooms. There's a big need for this. Customers have been eagerly anticipating sort of some of the feature sets that we're going to put out there. And so, I think that, you know—and, you know, competitively, we're in a good position for LIFEPAK, just given where some of our competitors are in the market right now, too.
So, there is a lot of anticipation for LIFEPAK, and, I think again, there, it will give a lot of momentum to our medical and emergency care businesses.
Then, on 1788, you said opportunity to gain share. Have you disclosed what your current market share within endoscopy is?
I don't believe we have, Vijay.
These market share gains, should that be in line with historical product cycle launches when you had, like, the prior cycle launch?
Yeah, I think, look, to Glenn's point, as we think about the 1788 launch, I mean, it is differentiated, right? So is there maybe incremental opportunity in terms of size of price share, potentially? But yeah, we're super excited about it. And to Glenn's point, early days, right? We launched in September, and so, you know, we'll ramp through the end of this year and into next year, and then into 2025, really being kind of that second year of the launch.
These should all be incremental growth drivers, right, from a growth perspective for 2024?
Sure.
Well, and you did bring up pricing, Glenn. What's the general, average price uplift when you think about these new products?
I'm looking at Jason. It really ranges, but yeah, do we get 10%-15% more in price? For sure, on new products like this, especially ones that bring new technologies. There's not a lot of pushback. To the extent there is pushback, we can offer older generations of product to sort of meet the requirements of that customer. But that's, you know, that's been vetted after years of, say, launching some of these products. We know in the marketplace that especially the early adopters, teaching universities, places that want to have the latest technology, will pay more to gain that technology. So on the MedSurg side, you know, we are still fairly bullish about, you know, what we can gain in price for next year.
Gotcha. And so when you think about that mix improvement, should pricing be positive next year, Glenn?
All right, well, I'm not going to guide you on price for next year, but what I would say to my previous comments is we have really good momentum on price. We feel good about that. I think on the orthopedic side, it's just less negative, and we have good process in place now and know how to have these conversations with customers in ways that we weren't doing before. And so I think we'll hold our ground on the orthopedic side. So I do think that, pricing won't be as negative as it's been in the past, is what I would say.
I think the term you used, Glenn, at the Analyst Day was muscle memory, if you will.
Yeah.
I think there's a new organization, you know, which is going after pricing at an enterprise level. Maybe elaborate on what this new division is and what is it that they're doing different?
Yeah. I mean, it's called, it's called Customer Solutions, and what we did is we took, sort of our contract negotiation teams that existed within divisions and put them in a center-led organization. And if you think about how they negotiate. So on the orthopedic side, those contracts are, it's much more centralized. You know, it's big systems and GPOs pitting orthopedic companies against each other to figure out pricing. Although, I will say that Mako provides a little bit of differentiation. Because it's a closed system, they have to buy Stryker joints. And then on the MedSurg side, the way it really works is you basically, your product gets qualified within pricing bands, and it becomes more of a hunting license for your reps. So I would say that all of that expertise now is combined.
We drive really good process in doing it. We've recruited in some of our best salespeople to really lead those efforts, and we're seeing a really positive response and positive process. The other thing that we've done is we've wrapped way more data around what they're doing. So we, you know, we have a lot more reporting by contract. We can go to our customers and demonstrate, you know, where we have saved them money or where they actually haven't been compliant with their purchase commitments, and so that triggers different pricing. So all of that sort of information and process has really led us to be a lot more confident about how we're managing that process.
You know, and then the final leg on that stool is, at the field level, incentives have been put in place as part of commission programs within all of our businesses that speak to pricing. So what that does, at least psychologically, the rep doesn't go to the bottom of the pricing sheet right at the get-go.
Yeah
'cause they know it will impact their commission.
Fantastic. You know, I think we've spent a lot of time on these big three, right? You get a fair amount of attention from the street, but I feel like there's a lot more going on on and off. You talk about you know, Neptune, you know, smoke evacuation. What else do you have in the pipeline that excites you?
Well, you certainly, you certainly hit the biggies. Launching those robotic applications will be giantly exciting. You know, there's a lot of, there's a lot of smaller products that we'll launch that I know individually aren't as exciting, but they're products that'll have fast growth and accretive growth, and so those actually make a big difference. I don't know, is there anything we should be highlighting?
Maybe just the other one I'd highlight would be one we talked about on the Q3 call, which was Pangea in the-
Yeah
... in the
Yeah, yeah
... trauma division, right? It's—we've often been known as kind of nailing, right? This brings the plating portfolio and kind of into a complete set here, so super excited about that, the trauma division, which will launch early next year.
Was that a product gap, Jason, when you had, like, the nailing and now you have the complete suite?
Yeah, I think you could say that. You know, again, we were probably known more for the nailing, less plating.
Yeah.
This does bring it together and more of a total solution when you show up at a customer.
Yeah, I think, you know, we just, we weren't in step with our competitor on plating, to Jason's point. We were ahead on nailing. So actually we've been, you know, looking at our plating for quite a while. It's been under development, bringing a very competitive offering to the market, and I think Pangea is kind of the answer to that. And so, we're very bullish on what we're gonna be able to do with Pangea.
How, any way to sort of quantify or size the market? You know, what is your share within that market, and what this new product could do for that segment?
Yeah, we've got the market research paper out on our website. What I would say, though, specific to Pangea, and I think we even said this on the Q3 call, largest launch in trauma history, so it will be meaningful to that division, on the revenue side.
Gotcha.
Yeah, and as you look at that trauma market, it's basically a subset of that. It's nailing and plating that are both included in there.
Gotcha. And Glenn, at this Analyst Day, clearly, you were the highlight, right? With the margin target.
You stole the show.
I did, and it's not easy to outdo Kevin, but you did. I think you did. Gross-
Was this being recorded?
Yeah, gross margins are still 200 basis points below pre-pandemic levels, so when you think about the, you know, back to pre-pandemic operating margins, how much of that is coming from gross margin step-up?
Yeah, that's a question we've decidedly are not going to guide to. What I will say is that as we look at, you know, how do we get to 200 basis points, and what opportunities are identified, and where do they sort of fit within the geography of the income statement, there are lots of things to go after in gross margin. You know, we talked about price. Price is certainly one of those things. I would say the operating environment for supply has stabilized and maybe is more normalizing, so we think about getting back to our direct purchasing negotiations and volume discounts that we used to, you know, get.
If we also think about, one of the things we learned in the pandemic is that, hey, maybe we should insource some component manufacturing that previously we were outsourcing, just to have better control and honestly to do it cheaper. Then we also looked at product transfers, and where should we be making some products in geographies where, we can get labor arbitrage or, or sort of cheaper, cheaper outcomes. And then finally, I would say that, you know, distribution and logistics continues to be an opportunity for Stryker. We are sort of finally migrating away from, you know, putting everything on an airplane, and utilizing ocean freight again, which is significantly cheaper. And then the other thing we are is, we're looking at, you know, strategically, what should our distribution network look like?
And where, you know, can we use some of our bigger distribution facilities for even more product, and so leveraging that. And so I do think as we look at opportunities, that they're fairly balanced between OpEx and gross margin. The other thing, frankly, you know, if as long as we can keep growing at high single digits or even low double digits, there's the opportunity to really drive leverage over fixed costs. And that just naturally comes.
Gotcha. And I think at the Analyst Day, you mentioned some of the variables for the margin targets, FX and price. FX, it is what it is, but what are you assuming for pricing? Are you expecting, like, pricing to be similar to current environment? Is that what's being assumed?
Yeah, I mean, you know, beyond some of the upsides we talked about on pricing, I think pricing will remain fairly level. We're not expecting giant movements one way or the other.
Gotcha. And I think a lot of investors, and the street was focused on the cadence, right? 200 basis points over the next two years. Should we straight line that? Should we front load that? Or is it back-end loaded? Any clarity on-
Yeah, I don't know that we're gonna tell you that at this point in time.
Okay.
You can, you can send your model to Jason, and he'll plug in the right cadence. But, yeah, we'll provide more details in January.
But what should the levers be when you think about the cadence for maybe the variables we should be thinking of? We should drive those cadence on the margins?
Well, some of the things that I just mentioned on gross margins certainly are variables and levers. I think some of the other things down in operating expenses, you know, we basically are kind of back to what I would call our 2019 travel meeting and sort of customer promotion budget. So that will remain stable now, whereas before it was growing at a rate that was not helpful to op margin. I also think, too, that, you know, as you look at what we're doing with shared services, you look at what we're doing with our IT footprint, we're well underway in a lot of those efforts.
Mm.
So we'll start to see really good, you know, payback and performance and ability to leverage those things, as we move forward, too.
Gotcha. Maybe the last minute here, Glenn, free cash, I think you've said, the goal is 70%-80% free cash conversion. Why, why is 80%, sort of a theoretical limit, for the industry? Why can't we aspire to be more than 80%?
Yeah. Is that for the industry? I think, a couple of things for us, you know, when you're growing at 200 or 300 basis points above market, you, you gotta, you gotta feed a lot of things to keep that going. And that would include working capital, that includes CapEx to expand capacity so that you can make enough product to do that. And then also, the other factor is, if you look at, you know, our M&A activity and our appetite for M&A, that has a lot of operating cash impact as well in any given year where we do M&A. And so those things, I think, are generally some of the limiters that sort of make 80% sort of the upper range of that number.
Understood. Then, then maybe the last one here, leverage levels are 2.5x. How does it impact your appetite for deals or deal size in the current rate environment?
Yeah, I mean, it's funny, if you look at our divisions, believe me, their appetite is still there, so that hasn't really impacted them. I think, you know, we've been working with the companies that are on our target list for a while now. I think that they have sort of realized more moderate valuations. So two things, we're seeing valuations come down. The other thing, too, is that we're holding firm on what our return requirements are relative to ROIC and to WACC. And so, if the deal can't meet those hurdles, then we're essentially not going to do it.
Fantastic. I think with that, we're out of time.
All right.
Glenn, Jason, thanks for the time this afternoon.
Thank you. Thanks for having us.