Welcome to the fourth quarter and full-year 2022 Stryker earnings call. My name is Tamia, 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.
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, Chair 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 Jason Beach, Vice President of Investor Relations. For today's call, I'll provide opening comments, followed by Jason with the trends we saw during the quarter, Mako performance insights, and updates on Vocera and Wright Medical. Glenn will then provide additional details regarding our quarterly results and 2023 guidance before we open the call to Q&A. I will begin with the macroeconomic environment. 2022 was a year where we, alongside many companies, faced unprecedented supply chain challenges and inflationary pressures. We faced these challenges and delivered for over 130 million patients and for our customers all over the world.
We also remained focused on the future as we progressed our pipeline of innovation, enabling a super cycle of new product launches across our portfolio in 2023 and 2024. I want to thank our 50,000 employees for their unrelenting determination and agility. In the fourth quarter, we delivered organic sales growth of 13.2%, which brought our full-year organic sales growth to 9.7%. During my 10+ years in this role, these were record quarterly and annual growth rates. The growth was balanced across our businesses and regions in implants, disposables, and capital equipment, and was highlighted by our medical division, which had Q4 organic sales growth of over 25%. For the 5th consecutive year, our international organic growth rate exceeded our U.S. growth rate, demonstrating the progress we are making on globalization.
This was highlighted by Europe, Canada, Australia, and emerging markets, which all posted double-digit growth in the quarter. International growth remains a significant opportunity in the years ahead and should continue to complement our strong U.S. business. Next, we delivered quarterly and full-year Adjusted EPS of $3 and $9.34, respectively, exceeding our latest guidance range. This was driven by our strong sales performance, which offset inflationary pressures and negative foreign currency. Also, we are progressing with our actions to address higher costs, which include both pricing and targeted restructuring plans. We have begun to see the impact of these initiatives and expect an improving trend over the course of 2023. We also expect the positive trends in procedural recovery to continue alongside strong demand for capital products.
While component availability will continue to be variable in 2023, we do expect that it will gradually improve throughout the year, lessening the need for spot buys. We will remain disciplined with our spend and will continue to invest in innovation, including potential tuck-in M&A. We remain confident in the outlook of our business and expect to continue to deliver sales growth at the high end of MedTech, which is reflected in our full-year 2023 guidance of organic sales growth of 7% to 8.5%. This growth, combined with the continued challenging macroeconomic environment, our pricing and cost actions will translate to an Adjusted EPS of $9.85-$10.15 per share. I will now turn the call over to Jason.
Thanks, Kevin. My comments today will focus on providing an update on the current environment as well as Mako, Vocera, and Wright Medical. Procedural volumes continued to recover throughout the fourth quarter in most countries. Parts of Asia-Pacific, however, have continued to be more volatile due to ongoing COVID-related impacts. While volumes are recovering, hospital staffing pressures have continued in pockets around the globe, and patient backlog remains. As mentioned on the Q3 call, these challenges will likely resolve gradually, and we continue to expect this will be a moderate tailwind as we move through 2023. Additionally, demand for our capital products remained very healthy in the quarter, as seen from the double-digit organic growth of our medical, endoscopy, and instruments divisions. Even considering our finish, we exited the year with a very strong order book.
Next, specific to Mako, we had a record quarter of installations in both the U.S. and internationally. We continue to be agnostic to the form these deals take and will continue to offer flexible options for our customers to acquire capital equipment. The great progress of our Mako offense has resulted in strong growth of our installed base alongside continued increases in utilization. In the U.S., we saw approximately 55% of knees and almost 30% of hips performed using Mako in the quarter. Also, in December, we surpassed our 1 millionth cementless knee procedure with cementless knees continuing to index higher in Mako accounts. In addition to being the leader in robotic-assisted surgery, we are also well ahead on cementless knee adoption.
Finally, we are making good progress with the development of our Mako Spine and shoulder applications and expect to have the initial launch of spine in the back half of 2024 and the initial shoulder launch at the end of 2024. Now to our key acquisition and integration activities. Our Vocera integration continues to progress well and as a reminder, will anniversary in February of this year. Q4 results were consistent with our commentary on the last earnings call, as is the expected sales ramp beginning in Q2 of this year. Turning the page to Wright Medical. We've now passed the two-year mark of the integration of Wright Medical. This has been our largest acquisition to date. Now complete, we have exceeded expectations on both our sales and synergy assumptions as the cultural fit was strong, and we implemented our integration playbook very effectively.
Additionally, it was the catalyst that drove the creation of three separate business units, allowing us to serve unique customers across core trauma, upper extremities, and foot and ankle. All three businesses exited the year with terrific momentum and strong R&D pipelines. Overall, this acquisition has proven to be a great success, and we are excited about what the future holds. With that, I'll now turn the call over to Glenn.
Thanks, Jason. 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 13.2% in the quarter. The fourth quarter's average selling days were in line with 2021. The impact from pricing in the quarter was unfavorable by 0.6%. We continue to see a positive trend from our pricing initiatives, particularly in our US MedSurg businesses, which all contributed positive pricing for the quarter. Foreign currency had a 3.8% unfavorable impact on sales. The supply chain disruption somewhat lessened during the quarter, and our capital order book continues to be very robust as demand from our customers remains strong. In the quarter, US organic sales growth was 11.2%.
International organic sales growth was 18.3%, impacted by positive sales momentum across most of our international markets. For the year, organic sales growth was 9.7%, with U.S. organic sales growth of 8.9% and international organic growth of 11.7%. The impact from pricing in the year was unfavorable by 0.9%. 2022 had the same number of selling days as 2021. Our Adjusted EPS of $3 in the quarter was up 10.7% from 2021, driven by higher sales and strict cost discipline, partially offset by inflationary pressures and the impact of foreign currency exchange translation, which was unfavorable $0.16.
Our full-year Adjusted EPS was $9.34, which represents growth of 2.8% from full-year 2021, reflecting the favorable impact of sales growth, lower net interest costs, and a lower effective tax rate, partially offset by inflationary pressures and the unfavorable impact of foreign currency exchange translation of $0.31. We'll provide some highlights around our quarterly segment performance. In the quarter, MedSurg and Neurotechnology had constant currency sales growth of 19.3%, with organic sales growth of 16.9%, which included 14.9% of U.S. organic growth and 22.5% of international organic growth. Instruments had U.S. organic sales growth of 11.7%, led by double-digit growth in the surgical technology business. From a product perspective, sales growth was led by power tools, Steri-Shield, waste management, and smoke evacuation.
Endoscopy had U.S. organic sales growth of 9.7%, highlighted by strong growth in sports medicine, communication, video, general surgery, and ProCare. Medical had U.S. organic sales growth of 22.9%, driven by our emergency care and acute businesses. The growth was fueled by double-digit growth across our emergency care and prime stretcher businesses and also benefited from improvement in product supply throughout the quarter. Our U.S. neurovascular business had organic sales growth of 1.5%, driven by continued market softness and competitive pressures. The U.S. neurocranial business had impressive organic growth of 19.7%, which included double-digit growth in our Sonopet iQ, Signature high-speed drills, SILVERGlide bipolar forceps, and MaxFace Neuro product lines. Internationally, MedSurg and Neurotechnology had organic sales growth of 22.5%, reflecting double-digit growth in all businesses.
Geographically, this included strong performances in Europe, Australia, and emerging markets. Orthopaedics and Spine had constant currency sales growth of 8.3% with organic sales growth of 8.4%, which included organic growth of 6.2% in the U.S. and 13.6% internationally. Our U.S. hip business grew 11.3% organically, reflecting strong primary hip growth fueled by the recent launch of our Insignia hip stem, the ongoing success of the Mako THA 4.1 software upgrade, and continued procedural growth. Our U.S. knee business grew 7.8% organically against a very strong Q4 2022 comparable of over 14%. This reflects our market-leading position in robotic-assisted knee procedures.
Our U.S. trauma and extremities business grew 11.9% organically, with strong performances across all three businesses, led by double-digit growth in upper extremities and foot and ankle, and strong performances in plating and nailing. Our U.S. spine business grew 0.5%, led by performance in our enabling technology business, including the recently launched Q Guidance navigation system. U.S. other ortho declined organically by 18.7%, primarily driven by the impact of deal mix changes, specifically more rentals related to Mako installations in the quarter. Internationally, Orthopaedics and Spine grew 13.6% organically, which reflects strong performances in Europe, Australia, Canada, and India. Now I will focus on operating highlights in the fourth quarter.
Our Adjusted Gross Margin of 62.7% was unfavorable approximately 310 basis points from the fourth quarter of 2021 and in line with Q3 2022, reflecting the impact of the purchases of electronic components at premium prices and other inflationary pressures, primarily related to labor, steel, and transportation costs and unfavorable business mix. Adjusted R&D spending was 5.5% of sales, which represents a 90 basis points decrease from the fourth quarter of 2021. full-year Adjusted R&D spending was 6.7% of sales, which was slightly higher than our 2021 Adjusted R&D spending of 6.6% of sales. Our A djusted SG&A was 30.6% of sales, which was 150 basis points lower than the fourth quarter of 2021.
This reflects the impact of increased focus on discretionary cost control and headcount discipline. In summary, for the quarter, our Adjusted Operating Margin was 26.6% of sales, which was approximately 70 basis points unfavorable to the fourth quarter of 2021. This performance is primarily driven by the aforementioned inflationary pressures, primarily on gross margin and the negative impact resulting from foreign currency exchange translation, somewhat offset by cost discipline. Other income and expense of $53 million for the quarter decreased from 2021, primarily due to net favorable interest income. For 2023, we expect a quarterly run rate of $65 million for other income and expense. Our fourth quarter and full-year had an Adjusted Effective Tax rate of 13.8% and 14%, respectively, reflecting the impact of geographic mix and certain discrete tax items.
For 2023, we expect our full-year effective tax rate to be in the range of 14.5%-15.5%. Focusing on the balance sheet, we ended the fourth quarter with $1.9 billion of cash and marketable securities and total debt of $13 billion. Approximately $150 million of term loan debt was paid down in the quarter, which brings our year-to-date payments to $650 million. Turning to cash flow, our year-to-date cash from operations is $2.6 billion. This performance reflects the results of net earnings, partially offset by lower accounts receivable collections due to higher sales at the end of the year, the impact of higher costs for certain electronic components, and pre-buying of certain other critical raw material inventory during the year.
For 2023, we anticipate that capital spending will be approximately $600 million. In 2023, we do not plan to do any share buybacks, we'll continue to focus on further debt reduction. Now I will provide 2023 full-year sales and earnings guidance. As we assess the current operating environment, we believe that there will continue to be macroeconomic volatility, including supply chain constraints, recession and inflationary risks, and currency fluctuations. Despite this environment, we have positive momentum in many parts of our business heading into 2023, including continued procedural recovery, many new product introductions, and a very robust order book for our capital products. Given the above, we expect organic sales growth to be in the range of 7% to 8.5% for the full-year 2023 when compared to 2022.
There are the same number of selling days in 2023 compared to 2022, with one extra day in Q1 and one less day in Q3. Based on the steady progress of our pricing actions, we would expect the full-year impact of price to be between 0% and minus 0.5%. If foreign exchange rates hold near current levels, we anticipate sales and EPS will be modestly unfavorably impacted for the full-year, being more negative in the first half of the year. This is included in our guidance. While we are not specifically guiding the quarters, keep in mind that as you compare the first quarter to the prior year quarter, Q1 2022 did not have the inflationary pressures that we are now experiencing. Despite a strong growth out-outlook, we do not expect Q1 EPS to be much better than Q1 2022.
Finally, for the full-year 2023, we expect adjusted net earnings per diluted share to be in the range of $9.85-$10.15, representing a return to op margin expansion. This guidance range assumes a gradual improvement of the global operating environment, including a progressive easing of supply chain disruptions throughout the year. Now I will open up the call for Q&A.
We will now begin the question-and-answer session. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason at all you would like to remove that question, please press star followed by two. Again, to ask a question, please press star one. As a quick reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. Our first question comes from the line of Robbie Marcus with JPMorgan. You may proceed.
Great. Thanks for taking the questions, and congrats on a really nice quarter. I wanted to start out on the MedSurg side of the business, where you had really, really strong performance in the fourth quarter. You talked about a healthy order book, but I was hoping you could give a little more visibility into exactly what you saw. Was there a bolus of demand there? Was this all underlying or catch-up demand? You talked about a healthy order book, but just what you're seeing in terms of your hospital clients around the world and their desire to continue to buy capital here?
As you can tell, Robbie, it was a terrific quarter for all of instruments, endoscopy and medical. Medical, in particular, had a giant growth in the quarter, really digging out of some of the backlog that they had of orders. If you look at the backlog entering 23, it's actually higher than what we had at the end of 22. It was a little bit of catch up from prior quarters, but as we think about next year, the outlook for all three divisions is strong again next year. We also have a lot of new products coming in those three divisions. Strong order books, strong demand for our products, strong cadence of new pipeline, terrific leadership teams.
This really, these three divisions have been, if you go back even to from 2016, they're, every year, they're either high single-digit or low double-digit growers. That was no different in 2022.
Great. Maybe a follow-up for Glenn. You talked about second half probably better than first half. I've been on this call a bit before this call, and you talked about first quarter EPS not being much better year-over-year. Any other color you could give us, both on the top line and bottom line as we think about 2023, just given there are some highly variable growth rates on the top line, as well as margin things to think about down the P&L? Thanks.
Yeah. Yeah. First of all, like, just picking up where Kevin left off, if you think about the top line, entering the year with such a strong order book is really going to kind of bode well for growth of our big capital businesses. The other thing we're really seeing is this procedural expansion. You know, we feel really good about our momentum, especially in hips and knees, and trauma, and extremities. We're going to continue to see those grow as well. You know, that plays into the mix of what we see when we get down to gross margin. You know, we do think the first half of the year we'll be working our way through some of that higher dollar inventory that was built up at the end of last year.
We are seeing some bright spots in supply chain. We are seeing, you know, an environment where we think there'll be less spot buys. So all of that will go into in terms of us progressively improving both our gross margin and our Operating Margin. I think the other thing to keep in mind too is that, you know, our pricing initiatives and actions really took hold in Q4, and we felt that especially on the MedSurg side, we'll benefit from those actions for the full-year in 2023. We'll also see that's not included in price all the new products that Kevin talked about that we'll launch. Those come out at premium prices, so that will also benefit and help us with our Operating Margin improvement.
The last thing is, you know, we still have some targeted restructurings that will take place in 2023, especially in the first half of 2023. We'll also begin to feel the benefit of those in the second half. I think, you know, Q1 is a little pressured year-over-year just because the inflation wasn't sitting in last year's Operating Margin, and it is sitting in 2023 Operating Margin. I think as the year progresses, we'll continue to improve on that Operating Margin, and obviously that will drive to the EPS growth that we guided to.
Really helpful. Congrats again. Thanks.
Thank you.
Thank you. The next question comes from the line of Matthew O'Brien with Piper Sandler. You may proceed.
Afternoon. Kevin, you know, at the analyst day, what was it? Whatever it was, a couple of years ago, you really emphasized international. The performance in the quarter was phenomenal, and it's been really strong. I'm just wondering the durability of that. Should we think about international being not quite half of the growth on the top line this year, but something around that level? Is that how important international should be for you guys in 2023 and even beyond? Thank you.
Yeah. Rather than thinking about what percentage of the growth is, just how durable is it. Five years in a row now, organic sales growth has exceeded the U.S. organic sales growth. Of course, China has really didn't contribute anything in 2022. Europe was double-digit grower. It's a growth engine for Stryker. You know, I've talked about Europe for the last six or seven years, and we are hitting our stride in Europe. Even other emerging markets, whether it's Latin America, whether it's the Middle East, Eastern Europe, parts of East Asia, we've really started to hit our stride. It feels exciting. We have great leadership teams. We're getting great penetration now with Mako and Fluorescence imaging, some of those power brands are now really starting to show up effectively.
The way I'd like to think about it is that emerging markets should grow roughly double the growth rate of Stryker's growth rate. Overall, we should continue to grow above the Stryker growth rate in these international markets. As over time, if we don't continue to have large acquisitions in the US, then that will become a bigger and bigger percentage of our business. Being acquisitive, you know, it's still pretty small if you think about 72% roughly of our sales are in the United States. It's starting to have a material impact, and you saw really an outstanding quarter in Q4.
Got it. Thank you.
Thank you. Our next question comes from Vijay Kumar with Evercore. You may proceed.
Hi, guys. Thanks for taking my question, congratulations on a really strong finish year. Kevin, maybe the first one on the performance here in the Q4, teams organic, that's quite outstanding. Sequentially, it looks like your growth accelerated by 350 basis points. Can you know, put some put those numbers in context for us? Is this share gains, or is this your supply chain situation improving? You know, I'm assuming there was some headwind from China, maybe if you could quantify it and just help us understand what went into that pretty stellar 13% number in that Q4.
Look, I think the outsized growth is in the medical division, right? Medical division isn't gonna typically grow 26% organic, right? That's outsized, and that's really, let's call it, making up for supply. They had huge orders, and we were able to get healthy in some of the product lines, and we were able to get a lot of shipments out the door. That kind of variability could happen from quarter to quarter. If you look at a full-year kind of organic growth rate, instruments 10%, endoscopy 15%, medical 11%, kind of on a rolling 4-quarter basis, those are really outstanding results. It's not a 1-quarter wonder. I would kind of look at the overall year having organic growth of 9.7%. That's, that's the highest I've had in my tenure.
We have new products, I would say they're as good a set of pipeline as I've had since I've been in this role. That bodes well for next year. We're starting with the highest organic growth guide that we've ever started with. Assuming launches go well and everything, this should be another very, very strong year. You will see a little bit of volatility quarter to quarter, primarily with medical, because they do have the largest backlog of all the divisions in the company, and a more consistent performance with the implants side of the house.
Understood. Maybe off of those comments, Kevin, and maybe perhaps for Glenn, as well. That 7-8.5 guide for fiscal 2023, is that a front-loaded guidance? Just, you know, when I look at the comps here for in 2022, is that 7-8.5 front-loaded? What is it assuming for supply chain? Are you assuming supply chain to improve just given off of Q4 levels? The order that you mentioned, Kevin, did that backlog grow versus third quarter or are we starting to work down on that, the backlog?
Hi, Vijay. Vijay, I'll take some of these. If I miss a part, you can correct me. You know, first of all, the growth is not front-end loaded. It's pretty steady throughout each of the quarters. You'll see that there is gonna be solid growth just given sort of the momentum that we're feeling from fourth quarter. In terms of the order book, you know, we exited 2022 with an increase in the order book over year-over-year. We don't. We feel like that's a great tailwind for us for the whole year. Then did I miss the third part?
No, I think you covered it.
Yeah. Okay.
sorry. On the supply chain situation.
Oh, yeah. As I mentioned, you know, we assume that we'll see gradual improvement in the supply chain. We saw some of that in Q4. You know, we actually feel pretty good about our access to supply. We are seeing a reduced volume of spot buys, which are those really high-cost items. We're also beginning to work with our original set of vendors and also going up the food chain and actually working with chip suppliers so that we feel like we have a good handle on what's gonna happen with supply chain, but it should become better, you know, quarter to quarter to quarter with good improvement and visible improvement in the back half of the year.
Understood. Thanks, guys.
Thank you.
Thank you. Our next question comes from Shagun Singh with RBC. You may proceed.
Great. Thank you so much for taking the question. I was just wondering what you have assumed for margin expansion in 2023 relative to your at least 30 basis points of outlook that you previously shared. I was wondering if you could talk a little bit about the recon business in hips and knees. You know, in knees, you know, your major competitor does have a new cementless launch . You know, do you see that as a price mix benefit for them or something that could drive competitive account conversion? On hips, it came out stronger than what we were expecting. I was just wondering if you could talk a little bit about the drivers and if we could see meaningful share gains on the hip side similar to what we've seen in knees.
Thank you for taking the questions.
Yeah, great question. I'll start out and just touch on the margin expansion. We typically do not guide on op margins, so we're not gonna, we're not gonna pinpoint an expansion number. You know, I think, you know, backing up from EPS and looking at tax and OI and E and where we are with sales that you'll see that the math doesn't work unless we expand op margin. I think what you'll see is a progressive improvement each quarter in that expansion, especially as the comparable includes inflation from the prior year. That's what our plan is.
Yeah. Related to joints, obviously, we're delighted with the year that we've had in both hips and knees. Having global double-digit growth in both hips and knees is terrific. The hip strength clearly driven by the launch of the Insignia hip stem. As a reminder, we're only about a little less than halfway through that launch. We still have a lot of sets to get out. It'll take us all of this year and maybe into a little bit of the first quarter of 2024 to be fully launched with Insignia. We're still kind of in the gaining momentum mode with Insignia, and that's coupled with the 4.1 Mako hip software. We expect hips to continue to be very strong.
As it relates to knees, clearly that's been an outperformer for us for the past six, seven years since we launched the Mako Total Knee application. With cementless, where we continue to gain, I'm not at all worried about competitive entrants on cementless. People aren't gonna move away from our cementless for a competitive product when we have tremendous proven, you know, Jason mentioned 1 million procedures already done and competitors just starting to launch theirs. They're gonna be obviously very cautious before they move to another product on something like that. That synergy with cementless and Mako is really significant. Last thing I'd say is we're launching new software, just like we did with hip with the 4.1. We call it TKA 2.0 Mako software.
We're in the middle of a limited launch. It's going exceptionally well. We expect the full launch sometime by around Q3 of that new software upgrade, which creates better user experience, better for training residents and teaching hospitals. Very good feedback on that. We do expect to continue to outperform in both knees and hips again in 2023.
Thank you for the color.
Thank you. Our next question comes from Ryan Zimmerman with BTIG. You may proceed.
Hey, Thanks for taking the questions. Not to take away, this was a really good quarter, Kevin, I do wanna ask about two segments that were maybe a little softer than expectations. You know, neurovascular and spine both, you know, come on the back of what I think what, you know, we'd consider easier comps, and you can certainly challenge me on that. You know, what are you contemplating in terms of your guidance for growth in those areas for 2023? Just commentary on both the neurovascular and the spine segments this quarter and kind of what impacted results.
Certainly on the neurovascular comps, we did have pretty good performance a year ago in neurovascular. I think that the challenge is kind of looking at versus the prior year neurovascular and then going back versus 2019. Certainly we've had our challenges with neurovascular in the U.S. We've had continued good growth outside the United States, and I think I've mentioned on prior calls that the ischemic market segment has certainly gotten softer. There are a lot more competitors that are kind of distracting and taking up time. We still think it's a great market. There's still a lot of patients that have not been treated. We're only treating a small percentage of people that have these large vessel occlusions in the brain.
We do think it's a good long-term market. We are launching a new Coil, called a Tetra Coil, here in the United States, which is exciting. We'll continue to, you know, continue to invest. We have a deal that's pending, obviously regulatory clearances before it closes on a one and done, for the, for the hemorrhagic segment. We're very excited about that acquisition. That'll give us another shot in the arm. Yes, we've had our challenges in the U.S. this year. We continue to grow very well outside the United States. It's still a market we're very committed to. That's kind of on the neurovascular side. On the spine side, look, the launch of Mako Spine is gonna be critical. The Q Guidance launch is going very well, and that was important for us.
We had a gap obviously with enabling technologies, which is really important in the spine segment. I do believe this is, 2023 will be a year where we'll continue to grow kind of around the market growth rate and then really get ready for the Mako launch to be able to start to grow above market. Yes, they're not as glowing, the divisions right now as some of our other divisions, but they're certainly competing well in the marketplace, growing roughly in line with the market, maybe a little bit below, but still highly profitable, highly important businesses to the long-term future of Stryker.
Very, very helpful. If I could just ask a follow-up. I mean, this was the first time you really, I think, put those timelines out on spine and shoulder. We've kind of danced around these topics for some time. You know, what is it now that gives you comfort to put those out there, and ensure that those will be on time with the timelines you outlined?
Yeah. You know, as a company, we tend to be pretty conservative on giving timelines, and robots are hard, right? Ask any of the companies who are trying to launch robots, whether they're in hard tissue robotics or soft tissue robotics. Robots are difficult. What gives us confidence is our prototypes are built. We've tested it with surgeons. We've gotten feedback. We've had some meetings with the agency to get an idea on the regulatory pathway. We have enough in the pipeline right now. There's always a little bit of uncertainty around approvals and full launch. Notice the term I used was initial launch, right? We do expect to get approved and to start doing cases. As you do those initial cases, you might have to refine some of the training and things.
It might be a little bit slow out of the gate. We'll see. The beauty of our approach is, it's the same robot that's being used for hips and knees that's gonna be used. We have, as you know, thousands of them now out there. That is exciting that we'll be able to just do a software upgrade, have a different attachment, and be able to use the same robot. I think a lot of hospitals will be excited about that if their robot's not being used on one day of the week, and they can have that being used for spine initially. As the demand increases, they can have a dedicated robot for spine.
We really believe that'll be different than when we started, where each robot had to sort of be justified on its own. Having one sort of robot with all these different applications will be powerful over time. We feel confident just based on we spent a lot of money, and we spent a lot of time on this. The shoulder one took a little longer. As you recall, we thought that was initially gonna be before spine, but we decided to move away from our implants to the Tornier implants and to use the Blueprint planning software. That caused a slight delay, but the teams are really working well, and the feedback we're getting from surgeons that are seeing it is extremely positive.
Great. Looking forward to it. Thank you for taking the questions.
Yeah, we are too.
Thank you. The next question comes from Vik Chopra with Wells Fargo. Your line is open.
Hey, Thanks for taking the question. This is Vik in for Larry Biegelsen. Kevin, you know, you talked about a super cycle of new products. Just remind us sort of what they are and how we should think about their impact in 2023. My second question is maybe just comment on your trends in China, sort of what are you seeing there, and maybe just the impact on neurovascular and VBP. Any color you could provide would be helpful. Thank you.
Okay, there's a few questions in there. I'll do the super cycle, and then I'll pass it to Jason for China. On the super cycle, System 9, our new power tool and instruments launched just at the end of last year. We're gonna see the first real year of impact here in 2023. Initial feedback, extremely positive. We know how to do these. As you know, we've from System 6 to 7 to 8 to now 9, that's one of the, you know, flagship product. We have the 1788 camera and endoscopy that will be initially launched in Q2. Probably see more of a pickup in Q3, Q4, a fabulous new camera, which, as you know, we've done in the past, whether it's 1488, 1588 AIM, 1688 AIM.
These are things we know how to do, and these are fabulous products. We have Neptune S, which is a small footprint Neptune product designed really for GI that is a terrific new market for us. We today, Neptunes are not really being used in GI. It's designed special purpose for that to catch the polyps. Nurses are gonna absolutely love this. We actually believe it could increase the procedures that they can do in a day, which of course the GI teams are gonna love. That's also another really powerful product that we're excited about. Towards the end of the year, and won't have a big impact in 2023, but certainly much more in 2024, is gonna be a new defibrillator.
It'd be in 2023 outside the United States, and then early in 2024 inside the United States, which is the big pre-hospital, expensive, complex, LIFEPAK defibrillator. Those are three big flagship products that very rare to have them all within kind of an 18-month period. That's, that's a super cycle. Beyond that, you know, obviously, the Insignia product is gonna continue to launch. We have the CD NXT product, which allows for depth perception as you're drilling. We have Signature II, which is launched just this year, which is gonna have a full effect next year in neurocranial, which is for neural power drills. I could list another, you know, a whole bunch of foot and ankle products. We've got, you know, products in the shoulder space. There's a full list of products.
Those big ones I mentioned are why I call it a super cycle is you normally have one of those every two years or three years, not all in a short, compressed timeframe. You've got the ProCuity bed that's continuing to get rave reviews, and that's kind of still in the early phases of its launch. You know, as healthy as I've had in my time here at Stryker in terms of new product cadence. On China?
Yeah. Vik, as it relates to China, as you well know, right, China as it relates to total Stryker, less than 2% of our sales. Even if you consider some of the lockdowns and things in 2022, immaterial to our results in terms of Q4. As you think about 2023, early days as it relates to neurovascular VBP, we're certainly keeping an eye on that. As we think about Q1 and then full-year of 2023, when we get to the next earnings call, if there's anything material to disclose, we'll certainly do it at that time.
The next question comes from Matt Miksic with Barclays. You may proceed.
You know, I just wanted to maybe get a sense, you know, and I know we could, we could spend a lot of time talking about the many things that are going well and could go really well this year. Just to follow up on spine, the investment in the robot is significant. The portability of that hardware and, you know, upgrading the app as you described, Kevin, is great. You know, between now and then, whether it's Q Guidance or whether it's
You know, you know, implant launches or system launches or investments that you're making, you know, can you talk about maybe anything that you would see as kind of gradually driving up momentum in that business as you head into that introduction of the robot next year? Yeah. Yeah, sure, Matt. Certainly, we can't just wait only for Mako. I tell you that Q Guidance has actually exceeded our expectations. The customer feedback's been excellent on that, and the sales of those systems has been terrific. We also have a bunch of distribution deals that we've entered into for expandables, for different products. Two or three of those. We have the Monterey new product as well with Tritanium, which is pretty exciting.
We do have a, like, what we'll call it, a cadence of new products planned that'll be either developed by Stryker or through distribution to help fill product gaps. Pretty excited. We have our sports medicine leader, Andy Hamer, who's head of R&D, has moved over to spine. If you look at the last decade, our sports business was the fastest launcher of products across all of Stryker, and I think he'll give that team a big shot in the arm. He moved over kind of midway through last year, and excited to have him as part of the team. As you know, we've made other changes within our management team and I'm pretty bullish on their prospects for the future. We won't sit on our hands and just wait.
Already some of those products, even the Life Spine distribution deal, those kind of products are really helping. I was at the spine sales kickoff meeting for the year. The momentum is really strong. The teams are feeling good about the future and knowing that Mako's coming, of course, helps a lot. It's a tough market, as you know, and it has been a tough market for a long time. I feel like the combination of this distribution-filled, we'll call them gap-filling products, as well as some new products that we have planned, should put us in pretty good position even prior to the launch.
That's excellent. Thanks so much.
No problem.
Thanks, Matt.
Thank you. The next question comes from Pito Chickering with Deutsche Bank. Please proceed.
Hey, Thanks, for taking our questions. Can you guys hear me?
Yes, we can.
We can.
Thank you, Peter.
All right, great. Pre-COVID, the first quarter is about 23% of the annualized EPS. Start with the commentary on no EPS growth for first quarter 2023. Looks like you're guided about 20% of annual EPS. I understand the hard inflation comps in 1Q, why should 1Q be underweight the annual EPS number versus pre-COVID years? Should we take this as just back half margin expansion for 2023?
Yeah. I think, you're astute in your numbers. It definitely will be back half margin expansion for 2023. You're right. We'll see relative flat EPS in the first quarter, and then obviously meaningful expansion starting in Q2, but really accelerating in Q3 and Q4 to drive to the EPS that we guided.
Okay. Just a quick one here on capital outlook. You know, your commentary is very bullish. Can you just quantify us what the new orders in fourth quarter of 2022 were and how it compares to fourth quarter 2021? Thanks so much.
Hey, Pito, it's Jason Beach. You know, we won't quantify in terms of what we have from an order book perspective. You know, I would just point back to, I think, what Glenn Boehnlein said earlier around, and maybe it was Kevin Lobo, but the order book as we exited 2022, is even larger than when we exited 2021. We continue to be quite bullish on the capital side as we enter the new year.
Yeah, that's not a new commentary. All the last four months, I think our commentary has been very consistent on capital. You know, are hospitals having challenges with their P&L in some cases? Sure. We're not seeing it in orders. We're not seeing any cancellation of orders. Are some projects being delayed here and there? Sure.
It really is not having any kind of material impact on our outlook for capital. A lot of our capital is revenue-producing type of capital, so you wouldn't expect any kind of slowdown. Even in the large capital area, if I look at our communications business within endoscopy, they had a fantastic year, helped drive some of the endoscopy growth, and they have a terrific order book going into next year. That's large capital that sometimes in prior recessionary cycles had been deferred. We just aren't seeing it yet, so that gives us optimism to kind of lean in on the growth for at least for 2023.
Great. Thanks so much.
The next question comes from Steven Lichtman with Oppenheimer. Your line is open.
Okay, great. Just on growth in the, in the quarter, one of the factors you pointed to, Kevin, was procedural volume recovery. You know, one of the factors discussed obviously throughout 2022 on, in terms of capturing those procedures was hospital staffing. Are you starting to see an easing of that factor? You know, any color you're seeing in terms of that here in the U.S. would be helpful.
Look, there are flashpoints where you do see staffing as a challenge. The hospital systems are getting better at dealing with it. We've saw through from September through to the end of the year kind of a nice building of procedure and a steady kind of high volume. The demand is clearly there. There's no question that there's some pent-up demand, and surgeons are booked out for a good three, four months in general. We're seeing, I would call it a nice, steady kind of improving trend, and I think we'll see a moderate tailwind throughout the rest of this year. These flashpoints tend to be very short.
Even some of the, if you look in Europe and some of the areas that had strikes and real causes for worry. They've kind of come and gone pretty quickly. So we're feeling good about the outlook on a procedure standpoint and expect this to be a tailwind throughout the year.
Got it. Great. Glenn, just real quickly, I know you don't wanna provide specific margin guidance, but relative to inflation, did you call out or could you talk about what the impact was to gross margin in 2022 from inflationary headwinds and generally, you know, either directionally or specifically what you're looking for in 2023 on that front?
Yeah, I think, as we think about inflation obviously we felt the impact of the inflation numbers in the, you know, that were in Q3 especially that were very large. A moderation of that I would say occurred in Q4, but keep in mind to the extent that we purchased raw materials or made inventory at those inflated, you know, raw material prices, that's capitalized in our inventory. The other place that we'll feel inflation and that carries over to in this year is really gonna be labor costs that went up that are baked in now solidly for the year. We're still experiencing a pretty high inflation in our freight and transportation costs. Energy costs especially in Europe now have inflation baked into them. We'll feel it there.
I think what we're thinking though is we're not, as we look at 2023, that we're not thinking that inflation will continue to be at the levels that it was showing in 2022. We're feeling that that'll moderate and that's what's included in our guidance.
Sure. Understood. Thanks guys.
Thank you.
Thank you.
Thank you. Our next question comes from Drew Ranieri with Morgan Stanley. You may proceed.
Hi everyone. Thanks for taking the questions. Kevin, just for you to start, we've talked about the capital order book being stronger year-over-year, but can you maybe talk a little bit more specifically of what you're seeing in the hospital versus in the ASC setting? Any noticeable trends in, even in procedures in the ASC as you're entering 23? Then I had a follow-up.
Clearly this trend towards procedures being shifted to the ASC is continuing. It really accelerated during the pandemic, but there's no signs of that slowing down. Even if I look at our Mako installations, I would say this year is the record number in the ASC setting. As procedures move to the ASC, they certainly want to use great technology and I don't think that's gonna slow down. Every hospital system you talk to has construction plans around ASCs. I think that's just an undeniable future trend. Obviously that takes, it'll take time to build out more and more capacity, but we saw that increase in Q4 versus Q3 which increased versus Q2.
It's just a steady gradual trend and I'm talking mostly about hip and knee replacements but we're also seeing even some spine procedures being done, in the surgery centers, total shoulders and I just don't think there's any slowdown. It's just gonna continue over the next few years.
Got it. Then just for Glenn, you talked about the margin expansion for 2023. Could you maybe just highlight kind of what you're expecting for free cash flow generation? 2022 is obviously a tough year. It sounds like inventory will get better in the back half with just any broad-based thoughts on free cash flow for 2023. Thank you.
I think, you know, as you think about the biggest contributor to cash flow, honestly it's earnings. As we see progressive improvement in earnings throughout the year, I think we'll see that carry over into cash flow. There are some things that were maybe one-offs that we felt that we hope will get better in 2023. You know, that bolus of AR that we had at the end of the year in 2022 obviously we'll collect that and kind of get back to a regular cadence of DSO. Finally, you know, as inventory costs moderate and we feel more confident about supply, we'll draw down on some of those safety stocks that we had pre-buy. We'll also see just lower cost of inventory and raw materials and that should carry over to cash flow too.
The other area that I would highlight that maybe doesn't get a lot of attention is, you know, we continue to work on our AP and AP days and we've made incredible improvements over the past two to three years in terms of working with vendors and pushing AP out to beyond 70 days and we'll continue to work on that as well. I think, all of that bodes well for cash flow improvement but generally I think what you'll see is, as you see progressive improvement in earnings you'll also see cash flow follow.
Thank you. Our next question comes from Mike Matson with Needham & Company. You may proceed.
Yeah, Thanks for fitting me in. I guess I wanna ask one on M&A. I think you called out that you'd be looking to do some more tuck-ins. You know, what are you seeing out there with regard to the valuation expectations from potential targets? Seems like there was, you know, over the past year there's been sort of a disconnect between, you know, what the buyers are willing to pay and what the sellers want. I mean, is that starting to get more realistic now? You just maybe can just comment generally what you're seeing there in terms of deal flow.
Yeah, there's obviously the stock market reaction over the last year on companies that weren't making profits was pretty harsh. It takes time for that, let's call it a new reality to set in with people that wanna sell but as a company that is acquisitive. Has been acquisitive over time. This could bode well for us over the next couple of years if valuations kind of stay at this level. Obviously, the tuck-ins a lot of the tuck-ins we do tend to be private companies, not necessarily publicly traded companies. We have an active list of companies that we look at, where we are focused also on paying down debt, given that we took on a lot of debt for Wright Medical and Vocera. That's kind of job one.
Let's continue to keep paying down that term loan. We still have about $850 million left on the term loan. We wanna pay that down. If we see good opportunities and they're of the tuck-in nature, we aren't gonna wait. We'll make sure we do that. We can do two things at the same time, continue to pay down debt, but also do some small tuck-ins. The divisions are actively pursuing those, and we'll be ready to strike if the prices are right. I think this pricing environment is going to be positive.
Now profits do matter, and there was a sort of a period of time where a lot of companies ran away from us, to be honest, just on valuation, given that they were growing fast and the valuations were just out of sight. We just won't pay just whatever for something, even if we like the technology. We have to make sure to meet financial returns. Thanks for the question. We'll continue to look and sort of thread the needle between paying down the debt and then being opportunistic where we can.
Thank you.
Thank you. Our follow-on question comes from Joanne Wuensch with Citi. You may proceed.
There was a moment when you were rattling off, rattling may be the wrong word, all the different growth in MedSurg and Neurotechnology, and I could not get my head around some of these numbers. I'm just sort of curious, and maybe this has been addressed, how did this happen? Was this some level of pent-up demand in the capital equipment cycle? Was it just the end of the year that people had money in their budgets and they went, let's go? Help me understand what this is and, you know, do you expect there to be more of a depleted effort in the beginning of this year?
Look, Joanne, one of the great news about this quarter. First of all, it felt like a pre-pandemic Stryker quarter, is the way I describe it, where our sales teams were kind of firing the way they normally do at Stryker. Having big fourth quarters is not new for Stryker. We've had big fourth quarters many, many, many times. Our teams know how to finish, they, you know, they chase their numbers. Our hospitals also kind of wanna use up some of their budgets if they're on, depending on the calendar cycle that they're on. That's not new. What's really exciting is that we were able to dig out some of the backlog, specifically in medical, but not deplete. These are not pull forward sales.
We still have strong orders. We still have, you know, growth momentum that's going to continue next year. That's why you saw such a positive guide on organic sales growth. We're not calling for a soft Q1. I think Glenn, even in the Q&A, mentioned that we're not calling for a soft top line in Q1. Our implant businesses are continuing to hum. These businesses are just, they're special businesses. We have these dedicated business units. We've split them many times. You know, if I look at within instruments had 10% organic growth in 2022. That's because we decided to split orthopedic instruments and surgical technologies a few years ago. They're both growing extremely well. They both have new products, right?
We have a new Neptune, and we have a new power tool. In the old days, it was the same rep trying to sell both of those. Now we have different reps selling them. Our ability to scale those launches is so much better with specialization and dedication. That's kind of our formula, our growth formula. That's just, it's absolutely happening in our company. Our leadership teams are terrific. Our dedicated e-business units are firing and the products are flowing. You know, expect more of the same. If you look back, even going back to 16, as I mentioned before, and if you look at the kind of organic growth, it's of these three divisions, instruments, endoscopy, and medical, not to mention neurocranial, which has been an absolute home run, right?
That's really run by instruments, but we report it separately. You know, they're growing every year 8%, 9%, 10%, 11%, 12%. That's not unusual. Now that they have when you have new product launches, that tends to be on the higher side of it. Yeah, it's a good time to be at Stryker right now, especially in those businesses.
if I may, you did discuss new product cycle a couple of times. You've got a new power tool, you've got a new Neptune. What else would you like to highlight?
I mentioned before the camera. In endoscopy, a new camera that's a big sort of blockbuster flagship product. Sports Medicine has a number of new shoulder products that they're launching. Those are but that sort of helps fill out the bag. At the end of the year, we have the new defibrillator within our emergency care business. They launched a new I didn't even mention, they launched a new powered chair at the beginning of this year. If you wanna go up these apartment buildings, we now have a powered chair, which is fabulous. It's called Xpedition. I didn't even mention that one. I mean, it's just there's no end.
I mean, we've invested pretty heavily in R&D over the past four, five, six, seven years and, you know, spending close to 7% of sales, and the new products are flowing. I mentioned a couple other ones before, Joanne, but that hopefully is a good list for you.
It is. Thank you so much.
Thank you.
Thank you. Our next question comes from Eric Anderson with Cowen. Please proceed.
Hi, this is Eric calling for Josh. Can you guys hear me?
Yes, we can.
Yeah.
Excellent. Maybe thinking about cementless knees. I think about half of your knees are now going in cementless. Correct me if I'm wrong there. Where do you think that rate could be exiting 2023? Then maybe thinking longer term, what portion of your knees do you think will ultimately be cementless?
It's, it's a great question. We, we've now, we exited the year over 50% in the U.S. of our knees being cementless. The, the rate does vary in other countries of the world, but it's been a steady climb, frankly. They're gonna be more conservative on cementless than hips just because it's weight-bearing versus hips. Do I think it'll get to close to 100 like hips? Probably not. Just because of bone quality, because it's weight-bearing. We've not seen a slowdown. It's been just this kind of steady march. If you recall, a few years ago, it was kind of 30%, then it moved up to 40. Now it's moved just north. It's north of 50% now. I think you'll just continue to see that kind of steady climb. Where it will end, I don't know.
It's hard to predict, but probably somewhere in the 70s is kind of I think it'll. There's still room to run on cementless, obviously, we have a proven system that's delivering terrific long-term results given that we've done 1 million of them already.
Understood. Thanks for that. Apologies if I missed it, but are there any selling day impacts in 2023 that we need to consider?
Yeah. There's one extra selling day in Q1, one less selling day in Q3, but for the full-year, it's the same number of days.
Okay. Understood. Thank you.
Great. Thank you.
Thank you. Our final question comes from Eric Fleming with Raymond James. You may proceed.
Hey, guys. It's on for Jason at Raymond James. Quick question on your pricing outlook. Are there any segments that have a particular impact, or is it across all segments?
The, you know, obviously, the segment that has the biggest impact is really our MedSurg businesses. We saw Q4 pretty much all positive pricing impacts across MedSurg. We expect that to continue into 2023. I mean, that being said, on the ortho side, there's a lot of work around contracts and structures and rebates. We are seeing good momentum there as well on pricing. I think the other thing to keep in mind is that, you know, pricing is legacy product over legacy product. To the extent that we have these product launches like Kevin was talking about, we generally will launch with premium pricing over the legacy product, but it won't be included in that pricing statistic. It really gets included in volume.
You know, net-net, I think you'll see, you know, probably more favorable pricing coming out of the MedSurg businesses, but we are making great progress on the Orthopaedics side too.
Thank you so much. There are no further questions. I will now pass it back over to Kevin Lobo for concluding remarks.
Okay, great. First of all, I wanna thank all of you for your patience working through our technical challenges. As you can see, we had a terrific finish to last year, a really good start to this year. I've had a chance to be out with our sales teams across Stryker, and I could tell you the momentum is palpable. It feels like it's gonna be a strong year. We obviously are gonna continue to have some challenges around spottiness in the supply chain, but it certainly feels like the worst is behind us as we experienced last year. I wanna thank you all for joining our call. We look forward to sharing our first quarter results with you in April. Thank you.
This concludes the conference call. Thank you for your participation. You may now disconnect your line.