Stryker Corporation (SYK) Q3 2020 Earnings Report, Transcript and Summary

Welcome to the Third Quarter 2020 Stryker Earnings Call. My name is Karen, and I'll be your Operator for today's call. At this time, all participants are in a listen-only mode. Following conference, we will conduct a question-and-answer session. [Operator Instructions] This conference call is being recorded for replay purposes. Before we begin, I would like to remind you that the discussions during this conference call will include forward-looking statements. Factors that could cause actual results to differ materially are discussed in the company's most recent filings with the SEC. Also, the discussions will include certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release that is an exhibit to Stryker's current report on Form 8-K filed today with the SEC. I will now turn the call over to Mr. Kevin Lobo, Chairman and Chief Executive Officer. You may proceed sir.

Welcome to Stryker's third quarter earnings call. Joining me today are Glenn Boehnlein, Stryker's CFO; and Preston Wells, Vice President of Investor Relations. For today's call, I will provide opening comments, followed by Preston with some perspectives on the recovery trends across our diverse businesses. Glenn will then provide additional details regarding our quarterly results before opening the call to Q&A. I'm pleased to report that we returned to growth in Q3, posting organic sales growth of 3%. This represents a rapid improvement in our business, driven by a progressive return of elective procedures, ongoing demand for our medical capital products, and continued strong Mako performance. In the quarter, we saw uneven growth globally that correlates to the state of the pandemic. Preston will speak to this in his section. While we are pleased with the recovery of our business, the environment remains uncertain as flare ups of positive COVID cases are continuing. We had many achievements in the quarter that exemplify our commitment to innovation and providing our customers with the technologies needed to serve their patients. Beginning with Mako, we celebrated the installation of our 1,000th robotic system in the quarter. We've seen tremendous success with Mako since the launch of the total knee application in 2016 and this quarter was no different. We continue to believe that we're well positioned for sustained future success with Mako. Our spine and trauma and extremities businesses benefited from numerous recent product launches and Wright medical launched an exciting new acute care bed. Our neurovascular business also achieved some new product approvals in important market, which helped contribute to their double-digit global growth in the quarter. We maintained many of the policies put in place at the beginning of the pandemic focused on maintaining the safety of our employees and customers and aggressively managing spending. While sales and manufacturing have approached more normal levels, our spending levels were unusually low given the uncertainty regarding the pace of the recovery. Our R&D spending on an adjusted basis was 6.1% of sales slightly below our expectations as a result of COVID-related execution challenges, and some timing of spending. But none of this has caused any meaningful delays to new product timelines. The combination of sales growth and suppressed spending resulted in adjusted earnings per share $2.14 cents, up 12% versus the prior year. While some of our measures will remain in place -- our spending measures, we do expect some returns to hiring and investments to support future growth in Q4. Due to the continued uncertainty and lack of stability in many markets, we are not providing Q4 guidance at this time. We saw good momentum across many of our businesses in Q3, although the recovery curve acceleration moderated meaningfully in August and September, and has been on a similar trend so far in October. We are proceeding with the integration efforts related to the Wright medical transaction and are working cooperatively with regulators to obtain the necessary approvals for this transaction. This includes as previously announced the proposed divestiture of our STAR, Total Ankle Replacement product. We expect to close the transaction in November. Please note beyond this update, we will not be taking any questions regarding Wright Medical on today's call. Finally, I would like to thank our employees for continuing to serve our customers and finding ways to succeed during such challenging times. From our sales and service personnel in the field every day, with our customers to the marketing and R&D teams that are finding creative ways to connect globally, to advance new innovations, to our manufacturing teams and office staff who ensured the continuity of our business. We are living our mission statement, which is, together with our customers, we are driven to make healthcare better. And now over to Preston.

Thanks Kevin. Today my comments will focus on providing additional thoughts on the current environment and the recovery of select devices and geographies during the third quarter. We've generally seeing a V-shaped recovery through the second quarter with the continued momentum and growth in the third quarter, although at a more moderated level of month-over-month improvement. The sales growth and improved performance in the third quarter was driven by three main factors, the continued acceleration of electric procedures, strong demand for many of our large capital products, and the return of our more event-driven businesses like trauma and stroke. Small capital products, including our video cameras and power tools show nice improvement for the lack of other products in their recovery. These products generally trail electric procedure volumes by a few months. Despite a resurgence in infection rates globally, we saw sales growth in most developed markets led by strong recovery in the United States, Australia, Germany, and Canada. These markets were operating around pre-COVID levels throughout the quarter. Our China business returns to double-digit growth in the quarter, with procedures returning to more normal levels despite the government taking a more aggressive approach to lockdowns around COVID infection. The UK, India, and parts of our Latin American businesses continue to lag as they work through heightened impacts of the pandemic. Procedural areas that were deferred or soft during the second quarter showed significant improvements in the quarter, our knee, spine, trauma and extremities and sports medicine businesses all achieved year-over-year growth. This also showed significant improvement in the quarter reaching prior year levels. Each of these businesses benefited from the acceleration of electrodes procedures during the quarter that was fueled by the addition of new patients and the recovery of the previously differed backlog. Surgeons and healthcare providers continue to work through the new and existing backlog by adding incremental procedures to their normal schedules. With the continued variability of infection rate, we believe that hospitals are better prepared to ensure that these types of elective procedures can still be performed at some level, unlike the dramatic drop that we saw in April. However, the efficient ratio remains fluid and procedural impact and recovery will continue to vary across geography. Demand for our large capital products drove strong growth in the quarter, including ongoing high demand for our Mako robotic technology. In the third quarter, we were very pleased with the acceleration of Mako installations both within the U.S. and markets outside the U.S., so we continue to expand our Mako presence. Recently, Brazil approved full use of our Mako robotic technology for both hip and knee procedures. We are also experiencing increased utilization with a growing percentage of hip and knee surgeries being performed with a Mako robot. Within our medical division we saw strengthen our emergency care business along with continued high demand for our beds and stretchers, demonstrating improved financial stability of our customers aided by government subsidies like the CARES Act, and the resurgence of the positive cash flow driven by the continuation of elective procedures. As a result, our order book remains a robust for both Mako and many of our medical practice. The launch of the new acute care bed security is a contributor to that order book and a demonstration of our ongoing commitment innovation during the pandemic. With our specialized unit, category-leading product portfolio, and innovative technologies, we are well-positioned to continue our above marketing Medtech growth. With that, I will now turn the call over to Glenn.

Thanks Preston. Today I will focus my comments on our third quarter financial results and related drivers. Our detailed financial results have been provided in today's press release. Our organic sales growth was 3.3% in the quarter. These results included growth in the U.S. of 3.5% and international growth of 2.8%. As a reminder, the quarter included the same number of selling days as Q3 2019. Pricing in the quarter was unfavorable 1.4% from the prior year quarter while foreign currency had a favorable 0.4% impact on sales. During the quarter, we return to growth this demand for our procedural base products came back strongly in most key geographies and demand for large capital primarily Mako and medical beds remained strong. Our adjusted quarterly EPS of $2.14 represents growth of 12% from the prior year quarter. The foreign currency impact on the third quarter EPS was a creative by $0.01. The strong EPS growth was mainly driven by sales dropped through, favorable sales mix, discipline cost control, and better than expected gross margin leverage as our manufacturing output returned to more normal production levels. I will now provide some brief comments on our segment sales. Orthopedics had constant currency and organic growth of 3.8%. This included us growth of 7.5%. We saw growth across knees, hips, trauma, extremities, and Mako which grew 30.2% in the quarter. Additionally, all these products are growing up strong U.S. comparables from Q3 2019. Internationally, orthopedics had an organic decline of 4.7%, which reflects the slower recovery of elective procedures in Europe as a result of COVID restrictions, partially offset by a positive Mako performance. Medsurg had constant currency growth of 2.9% and organic growth of 2.5%, which included organic growth of 1.4% in the U.S. Instruments had us organic sales growth of 1.9%, reflecting increased demand for our safety related products, including waste management and smoke evacuation products, the latter of which had double-digit growth. Endoscopy had U.S. organic sales growth of 1%. This reflects a return to growth primarily driven by our sports medicine business, where we had double-digit growth. This was partially offset by moderate declines in core endoscopy and communications businesses. The medical division had U.S. organic growth of 3%, resulting from strong demand across its bed business, growing double-digits and emerging emergency care business growing high single-digits. These were partially offset by a decline in our [Indiscernible] business. Internationally, Medsurg had organic sales of 6.7%, reflecting very strong demand for medical products combined with positive performances across most of our Medsurg product categories in all major geographies. Neuro technology and spine had a constant currency growth of 5.5% in organic growth of 4.3%. Our U.S. neurotech business posted constant currency growth of 3.1%, including 1.7% of organic growth for the quarter. Overall, this reflects positive performances in our spine, CMF, and neurovascular businesses and included double-digit growth in our ischemic products. Internationally, neuro technology and spine had organic growth of 9.8% including double-digit performances in our hemorrhagic and ischemic products, and a very strong performance in our spine business. Now, I will discuss our operating metrics in the quarter. Our adjusted gross margin of 65.9% was favorable 20 basis points from the prior year quarter. Compared to the prior year quarter, gross margin was favorably impacted by volume and business mix, which was partially offset by price and some unabsorbed fixed costs. Although our manufacturing output returned to more normalized levels during the quarter, there was a somewhat negative impact related to our idle manufacturing lines at the beginning of the quarter. Adjusted R&D spending was 6.1% of sales. Our adjusted SG&A was 31.7% of sales, which was 210 basis points favorable to the prior year quarter. Compared to the prior year quarter, SG&A was favorably impacted by operating expense savings action enacted in March, which continued in the third quarter. In summary for the quarter, our adjusted operating margin was 28% of sales. All of the spend control measures that were enacted in March continued through Q3. These measures covered most of our discretionary spending, including curtailments and hiring travel, meetings, and outside consultants. As our businesses continue to ramp back to more normalized levels, we do anticipate that there will be increases in hiring, discretionary expenses, and other costs that support future growth and business expansion. Related to other income and expense compared to the prior year quarter, we saw a decline in investment income earned on deposits and an increase in interest expense related to additional debt outstanding. Our third quarter had an adjusted effective tax rate of 16.1%. Turning to cash flow and liquidity, we ended the third quarter with cash and marketable securities of $7.2 billion, which includes $5 billion of funds related to the Wright medical acquisition. We also generated approximately $830 million of cash from operations in the quarter, which was again ahead of our internal targets. This strong operating cash flow reflects strong net earnings and a reduction in poor working capital versus the prior year. The actions that were implemented in the first quarter to conserve cash continued in Q3, which included discretionary spending controls, reductions in planned capital expenditures and project spending, focusing on opportunities and accounts payable, and slowing our M&A activities. As it relates to guidance for Q4 and the full year, we reaffirm our previously announced decision to withdraw guidance, given the continued significance of uncertainties at this time. And now I will open up the call for Q&A.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] First question comes from Vijay Kumar with Evercore ISI.

Vijay, we can't hear you.

Vijay, are you on mute?

Okay, guys. Can you hear me?

Perfect.

We can now.

Fantastic. Well, congrats on a really strong print, Kevin. So -- and I guess, looking at these numbers here, some of the peers in quarter, you’re seeing low single-digit declines. You guys are seeing a positive declines, maybe parse out, what is that the underlying market versus this constant theme of Stryker gaining share? Is that what's happening? What's driving this trend here? And perhaps also touch upon new trends you're seeing here and for any reason. Now, I saw that we didn't have a Q4 guidance, but perhaps in a sequential trends we're seeing here in Q4, is there any reason to believe as Q4 trends should be perhaps different from what we saw in 3Q?

So thanks, Vijay. We're pretty excited about the performance in our business. It's not a one quarter thing. I think you've seen our joint replacement division, which includes hips, knees and Mako have been performing well for some time. And that momentum is continuing. I mentioned in my opening remarks that we're pleased with October, it's going well so far in the month. But I really don't want to speculate on November, December, just given all the products that are occurring, assuming that the market stays fairly stable, we're going to have a good fourth quarter. But that's a big assumption given this is, obviously a once in a lifetime type of pandemic. So I don't want to get ahead of myself, but we were feeling good about the business through the month of October.

Got you. And then maybe one on the capital side, you guys did mentioned strong order book for Mako, large capital. I know you guys just launched a new bed, perhaps just talk about that the visibility you have on the capital side of the business and is that a confidence that you can perhaps extrapolate into next year or is this -- perhaps Q4 and then we'll see how the market shakes out for next year?

Hey, Vijay, it’s Preston. Just to expand on that a little bit, I mean, we do continue to have confidence in our capital business. I think, as I mentioned in my prepared remarks, if you look at our large capital business and demand that we saw on Mako, and then on the medical business in particular, we feel really, really good about that. Small capital, as we talked about in the remarks as well, we expect that to continue to come along and recovery curve as well. Although, it has shown that improvement but lags a little bit, some of the other products in terms of that recovery. And I think overall we feel good about it, we feel good about where orders have come in, feel good about where our customers are in terms of their financial stability at this point in time, certainly compared to where it was a quarter ago and because of those items, we feel confident in where our capital business is headed. I think all of that is underscored, as Kevin said by the uncertainty that still remains with regards to debt flare ups and how the virus continues to kind of move through different regions.

Next question comes from Robbie Marcus with JPMorgan.

Great. Thanks for taking the question. And again, congrats on a much better than expected quarter. Kevin, how should we think about interpreting the comments on a go forward basis in respect to how much of a backlog is worked through, are there still patient to deferred procedures that that still need to get into queue here. And because it sounds like July was probably the best quarter, third quarter with fourth quarter current trends hold be similar, better or worse than third quarter here?

Hey, Robbie. It’s Preston. So, I’d say, in general, it's hard to predict exact percentages with regards to how much of a backlog has been worked through versus what are new patients that are coming into that funnel. Based on the feedback that we've got, we know that surgeons are continuing to work through that backlog, and that they're also adding new patients. So, it's definitely a mix of the two. We also know that there are some patients that are still waiting with anxiety to get their procedures done. But all-in-all clinics and surgeons remain busy, and they're continuing to look to add additional shifts or additional opportunities to add surgery or even a shift to the outpatient setting. Our expectation is that that trend will continue, again, barring any major disruptions from a COVID perspective.

Got it. And maybe just a quick follow-up. Once again, you had another great Mako quarter here even in the tough times of COVID. And I was wondering if you could speak to how willing your hospital systems are to go out still and by the large capital, considering it seems like your main competitor in robotics has shifted strategy to place a lot more units rather than recognize revenue up front, it appears you're still able to recognize a healthy amount. So just wondering what the environment is like, and if you're seeing them on the competitive side? Thanks.

Yes, look, we continue to feel very bullish about Mako, I think in Q4, we're going to have to unless something bizarre happens in the marketplace, it'll be a record quarter in Q4, because the order book is still very strong, with over 1,000. And we've kind of hit an inflection point. And in robotics, the interest in robotics is increasing every day, teaching hospitals are adopting robotics. And they're feeling the pressure to have robotics as part of their programs. And in some cases, they've been holding off a little bit. So for us, the momentum is palpable, it's continuing, it's strong. And it's even starting to pick up in other markets such as Japan and countries in Europe, they did a little bit of a pause in that second quarter. We saw them coming back, frankly, in the third quarter. So, the outlook for Mako continues to be very bullish. And it's really irrespective of competition. This is sort of a market trend that's changing the market shifting. And we really love the offering that we have in this category.

Next question we have is David Lewis with Morgan Stanley.

Questions. Kevin, I wonder if we could just talk maybe 2021, if we can't get the specific numbers, either relative to 2019 baseline or maybe just some top line qualitative commentary about how you're sort of seeing the top and bottom line for 2021, or specific product launches, and innovation pipeline, we should be thinking about for 2021. And then I have quick follow-up.

Yes, David, we're not going to really get into sort of guidance for 2021. We do that in every January, and right now we're planning to provide that in January. I think we've gotten good momentum across a lot of our businesses, you saw the trauma number, we posted a really strong number, they've launched a number of new products and feeling very good about that. And that's frankly before Wright Medical kicks in. So we're really excited about the momentum we're going to see across trauma and extremities next year. Neurovascular would be one that point that I'm really excited about. We have the surpass evolved next gen, flow-diverting stents stents approved in the United States and that had very good growth even though we're still having to go through the pains of posturing, but in the midst of a pandemic, so liberally from a small base, but that's going to pick up steam next year, as well our aspiration offerings with the neurovascular. So, neurovascular are very good as I look through into next year. And of course Mako will continue its positive trajectory that affects not just the Mako business, but of course hips and knees. And so those are all going well, instruments continues to be a really strong business for us and smoke evacuation you see is now becoming a standard in many areas called safety push, I think will continue beyond frankly the pandemic. And we've really established a really great stable of products related to safety. So, a lot of tailwinds. I think that will continue on a underlying basis. The big unknown is sort of how this pandemic evolved. It's still going to be with us obviously through the first half of next year in some way shape performing. And so that's not the big unknown, but a lot of the businesses that we have, we’re feeling good about the momentum and the product cadence in your product, which I've already touched on some of them, we think will position as well for 2021.

Okay. Very, very helpful. And the one business I wanted to highlight was just spine, obviously, that's been the sore point is last several quarters in years, some of your performance frankly was better than some of the emerging mid-cap spine players. Just what you're seeing in spine, have you finally the turn the corner from an integration perspective, you see more traction on sort of rep hiring, but it was a surprisingly strong quarter for you in spine just curious the underlying drivers. Thank you.

Yes, we're really pleased with the performance of the spine. I think that K2M, which was obviously tough integration. We knew would be tough, it was tough. We feel that that's largely behind us. I think we actually got a little bit of reprieve in the second quarter, honestly, to sort of get our inventory and get our position more stabilized. OUS, it’s has been strong frankly from the beginning, but it getting that U.S. business on a better footing. We feel very good about that. They launched some new products, including Niagara, which is a lateral access product, a Corpectomy Cage. And so getting back to launching products, which is a big part of the K2M offense, excited that we're now back to launching new products versus sort of dealing with all of the integration challenges as it relates to sales force very stable. In fact, we're actually having sales reps wanting to come to join Stryker now in spine. So we really do feel the tide is starting to shift in spine and was definitely very good quarter.

Next question comes from Bob Hopkins with Bank of America.

Hey, thanks and good afternoon. Just first question, I want to ask Kevin about your hip growth in the quarter and then just hit generally, your hip growth in the quarter was India's major below peers. So just wanted to talk about or ask you about dynamics there. But probably more importantly, also want to get your view on your pipeline in hips. And when you've got new launches coming, because I think in previous conversations, you’ve talked about some exciting launches potentially in that area?

Yes, Thanks, Bob. We're actually very pleased with our hip performance. We had a good growth in hips, and we had a very tough comp from the prior year quarter where we outperformed the market in hip. So, overall, yes, competitors did well in hips. We also did well in hips. As you know, hips are a little less deferrable than knees, which really speaks to the strength we added in knees. But as it relates, the hips were very excited about two aspects of the pipeline. The first is the on Mako, we have a new software upgrade for hips that we launched in the second quarter, because of the pandemic, we haven't really been able to roll that out fully. It will get fully rolled out probably by the end of Q4. So it's a progressive rollout, but really will have more of an impact next year and in the second part of the pipeline is a new standard that we have planned sometime in the middle of next year, we'll get more specific around timing maybe in the January call. But that's going to be an exciting span, which has some features that surgeons like in a little bit of a gap in our portfolio. But overall, still pretty good quarter.

Yes, yes. Okay, thank you. And then I also want to ask you a little bit about the potential for durability of growth in the medical division. And I'm not asking about fourth quarter, I'm thinking a little bit more longer-term, because there are a lot of moving pieces in that division. Right now it sounds like Sage might be struggling a little bit, but then OUS strength has been enormous. You're launching a new bed, and then there's the corner underlying bed market, maybe just talk about your thoughts on the durability of the growth outlook for that business in light of all the moving pieces?

Hey, Bob, it’s Preston. I think as I mentioned specifically on the capital side, we feel very confident where we're heading in terms of durability on that business, particularly as we think about things like beds and stretchers, with the launch of the new bed adding to that portfolio, very, very excited about what that's going to bring and do for us. Sage, Sage had a smaller quarter in terms of hips growth, obviously, an improvement from the second quarter, but still a little bit of a decline versus prior year. Given that business in terms of stocking and the purchase cycle, we really do expect that business can turn the corner as well as we go into the next quarter and into 2021. So I think we'll see some positive dynamics from that business. And then overall, obviously, we've seen some impact on the pandemic. And we would expect that we'll continue to see momentum on our businesses as we go forward. Specifically, as it relates to the OUS business, as you noted, we had a very strong Q3 performance really across both emergency care and our acute care business. I think it's important to note that we were really having big performances in the OUS space even before really the impact of the pandemic. And our expectation would be that even though while we're seeing some benefits, certainly from the pandemic, that we will continue to build on the momentum that I started giving before that as we go forward. So I think all-in-all, feeling very good about the future from a medical standpoint.

Next question comes from--

Yes. Just like to add one comment. The other part of the physio business is called public access. So that's outside of the emergency in the hospitals. And that business really got very, very quiet in the second quarter, it came to a halt almost. And so that'll come back, that'll probably be a little slower, maybe more in the first quarter, second quarter of next year. So, Sage will come back a little bit sooner, maybe towards the end of the year, and then public access will come back, maybe in the first or second quarter of next year. So there are parts of the business that are drags right now that will turn positive. And now of course, some pops that took off in the pandemic that will start to moderate. But we love our medical business. We love the leadership we have in that business, and it will continue to be a really good performer for us.

Next question comes from Matt Miksic with Credit Suisse.

Thanks so much for taking the question. Kevin, I just had a follow-up on this, ASC strategy have been pursuing and talking about a little bit. And I didn't want to tip your hands too much as to exactly how that all is going to work. But we'd love to get anything you are willing to share, progress so far, how it complements the another efforts to grow and maybe how it complements your relationships with some of the larger networks, which have an outpatient channel often? And I have one follow-up.

Yes, look, I'm not going to get into too many of the details about how we're doing it. But we are very pleased with our performance in ASCs, Mako number in the third quarter and ASC's with the highest number we've had so far in ASC, so Mako is part of the solution. We had double-digit growth in our sports medicine business. And of course, that plays in the ASC primarily. And so those are the proxy that you could use to figure out sort of how we're doing in the ACSs as we look at our sports med business. Look at the growth that we're having with Mako, there's a lot of other products that we have played very well in the surgery center market. And we just basically created an align offerings that aligns our divisions. As you know, in the hospital, we tend to operate very separately, and we go in by product category, we're not doing that in the ASC and this aligned offerings is really working very well. And I want to give credit to Eddie Pearson, the entire team that sort of established this office. It's working ahead of what I was expecting, and feel very bullish about it going forward.

That’s terrific. And then just follow-up, you mentioned strengthen growth in China, despite some of the pandemic controls you are putting back into effect there. And you've mentioned last call on the call before just about the move into China was Mako going forward and understanding that I'm guessing that a lot of that early activity is in the sort of premium self-pay market. And maybe any update or progress as to how that's going and any early results that you've seen in terms of feedback or uptake?

Sure, thanks, Matt. So let me start with Mako. So we only have the hip approved right now in China, we don't have yet have a total knee, we hope to get that in the first or second quarter of next year. It's taking longer than we had expected. But we're on track so we won't get it eventually approved. But we are getting sales with Mako for hip. But of course once you get the knee on the robot, and of course the sales will start to really accelerate. There's just been a general pickup in general. So the pandemic they've done a good job controlling the pandemic in the country. We've seen a pickup both in our Carson business, which is our lower priced products, as well as in the premium segment. So it's kind of I would say an across the board pickup that's occurring and really related to the Coronavirus. I think we had a great year last year in China, our best year on record in a good year, the year before we have strong management team both on the trusting side and in the premium segment. As you know, that's been a more recent thing for Stryker. So I would expect that we'll continue to see that kind of performance since the market conditions improved markedly.

Your next question comes from the line of Larry Biegelsen with Wells Fargo. You may proceed.

Good afternoon. Thanks for taking the question. To Kevin on the operating margin. In Q3, it obviously stood out the 260 basis points or so improvement year-over-year. And I heard the comments that, some of it was spending that you deferred because of the pandemic. But my question is, how much of this may be durable because of things you've learned, to do more efficiently during the pandemic, and how does it make you feel about, the 30 to 50 basis points of operating margin improvement on an annual basis that you you've targeted?

Yes. Hi, Larry, this is Glenn. You're right during Q2 and Q3, we obviously continued a lot of the cost containment measures that we had enacted in March. And these were kind of things that other companies probably have looked at travel, meetings, training, consulting. And just the real whole gamut of discretionary spending was really kind of locked down. We also slowed our hiring. We slowed project spending on sort of non R&D type projects. And I would say, coming out of this, you're absolutely right, we've learned sort of new ways to work. We're doing this call virtually, and it seems to be working fine. We also have launched virtual training with customers, and also internally that has worked very well. And so I would say, some of that very definitely will carry over to the future in terms of how we sort of emerged from the pandemic and what our operating structure looks like. That being said though, as we get back to more normalized operations, and back to a growth trend that we expect to be at, there will be increases to all those expenses. And some of them will return to pre-COVID levels just because that's what we'll need to support sort of the growth assertions that we'll have. Key projects will start back up. We'll see hiring pick back up. So all of that will start to grow with -- as we emerge from this. So, if you think about the 30 to 50 basis points, I do think that probably a more normalized basis to look at would be looking at 2019 in terms of an off margin that that we might assert relative growth off of. But we have not backed away at all from our financial assertions, we will grow at the high-end of Medtech. And we will continue to expand our off margin 30 to 50 basis points.

That's super helpful, Glenn. And one follow-up question. Just I think for Kevin, on M&A, with the exception of the right deal, you've been relatively quiet on the M&A front. Any thoughts? And is it due to valuations, just any thoughts on kind of your appetite and pipeline for M&A? Thank you.

Yes, thanks. We intentionally slowed down M&A in the second quarter, just because we were not sure what was going to happen with the pandemic. We asked the teams to sort of put their pencils down, stay active in discussions. But we really wanted to be sure that -- we didn't know that recovery would happen quite this quickly. So we're pleased with that. We do have our M&A teams back up and running. Because of the right medical and the debt that we're taking on because of that, we don't expect to be doing very large deals in the next year or so. But we look for more tuck-in deals. And we do want to stay busy with M&A. And we've said that to the rating agencies. Our teams are actively looking at targets but they sort of never really stopped. It did just slowed down a little bit, while we saw sort of a pace of recovery. But you should expect us to get back to our normal kind of tuck-in offense, which will complement the right medical acquisition.

Next question comes from Matthew O'Brien with Piper Sandler. You may proceed.

Good afternoon. This is Patrick on for Matt. Thank you so much for taking the questions. I want to start with Mako. You've done a really nice job with placing Mako and the underlying demand is really strong. But I'm curious if you could give us more color on the sales cycle. Specifically, I'm wondering if there's a chance that the sales cycle kind of over the longer term remains elongated as some of these hospitals work through financial pressures. So any color you have there would be really helpful? And then I have a quick follow-up.

Just to answer that, no, we don't expect that the sales cycles elongate. Matter of fact, it's one of the things that we've seen over the last couple of quarters is we've actually been able to get out and drive Mako even faster. And so there's still quite a bit of runway as you think about opportunities for Mako. So don't expect that that cycle to elongate.

Great. That's really helpful color. And briefly, I know this might be kind of a long -- longer way out higher level. But I'm just curious if there's any changes to the way you guys are thinking about the robotic offering in spine, either through a Mako platform or the Mobius asset. I'm just kind of curious about how you're thinking about that pipeline as the spine business really picks up momentum and starts heading in the right direction? Thanks for taking the questions.

Yes, thanks. We're really not ready yet to publicly talk about what the robotic offering is. It will be important for our sponsors. It's no question. Mobius did come with a robotic pipeline product. Once we're ready, we'll share. We're actively working on an offering we're just not quite ready to share what that will be and what the timeline is. But stay tuned.

Next question comes from Ryan Zimmerman with BTIG. You may proceed.

Thank you. Appreciate taking the questions. Congrats in the quarter. Kevin, you call about Sage performance being maybe a little weaker than expected, was that a reflection of procedural volume? Or is there anything from a protocol perspective in terms of preoperative sterilization that may have changed for some customers given the pandemic?

Yes, look, I will tell you, first of all, we weren't surprised by the STAR there wasn't weaker than expected, it was certainly negative sales growth. In fact, it was -- everything we had was a little better than expected in terms of the pace of recovery. The nature of the sales cycle per Sage, you need to have a lot of activity in the hospital where you have procedures being done, where the products are being used, because they're consumed, as you have people in the ICU, that people that are getting procedures done. And so the census in the hospital was lower in the second quarter for sure. And certainly even in third quarter. And these products are bought in bulk, and they're put on the shelf, because they're consumed daily. So you have this sales cycle that it sort of has to be depleted, the inventories have to be depleted before they're reordered. So that's not at all a surprise the fact that the sales were negative, it just sort of explains why that was a drag in the U.S. on our medical business, we don't have a very big stage business outside the U.S., it's more of a U.S. phenomenon. But we love the products. In fact, we launched a new product, a self-oral care product, which is really exciting in the midst of the pandemic, which is getting great customer feedback. But of course, that's just going to take time for that to be ordered. And then they put on the shelf. So once the ordering, once the usage starts to happen, and the inventory start to bleed down, we're going to get sort of this bolus of reordering. And again, that may not occur fully in the fourth quarter, but towards the end of the fourth quarter and into the first quarter. We'll expect that Sage to get back to its normal very strong growth.

Okay. And then just as a follow-up, one on Mako, not so much on the unit volumes, although it's certainly encouraging. But I think there was a software upgrade cycle earlier in the year, I could be wrong on that. I certainly call that the hip software upgrades. But how should we think about, the upgrade cycle for software of Mako in the install base, and what that can do for growth, maybe over the next 12 to 24 months within the existing customer base?

Yes, look, software upgrades are important. They just help with the ease of use and billing productivity for the surgeon. We did a software upgrade on hips in the second quarter. We are working on one for knees as well. The hip one had some very important -- but it wasn't just a software upgraded that had easy to use to do with registration, which is one of the frustration points perhaps, but it also provides new information to the surgeon on pelvic tilt, which they're finding really beneficial. So I do expect it will cause -- it was already increasing the use of nickel for hips, but that'll probably accelerate into next year. But that software upgrade is still being deployed in the field and then we'll share more about the new software upgrade when that happens as well. So we're -- this is not new, we constantly look to provide better usability and usage factors to our surgeons. And that's a common thing. But I wouldn't call that inflection point. It's just a continued good customer experience, which we'd like to have with all our products. The real boon is just the adoption of Mako, the success surgeons are having, the hospitals purchasing their second and third and fourth Mako’s, the growth in teaching hospital, the growth in surgery centers. So there's just -- it's just kind of the inflection point that we're seeing that I think will continue to last for many quarters ahead.

Next question comes from Joanne Wuensch with Citibank.

Good evening, and very nice quarter. Two questions. The first one is Mako related. There's a lot on this call. So I'll turn line in. Can you give us an idea of what percentage of hospitals currently have a robot? And where do you think it ultimately goes to? And instead of a cheaper question, because when we do our survey work, I talked to hospital administrators and physicians that have one, two, three, they seem to not be able to get enough robots or enough type of robots. I'd love your sort of view on the landscape. And then really, the second question has to do with seasonality. Is there anything happening in the big broad world outside of the pandemic that you think will impact the fourth quarter? Thanks.

Okay. Thanks, Joanne. So look, the first question it's really just about when you're in a new market adoption, it's not easy to predict, right? How far will it go? Should robotics become standard of care, as we've seen happen in some other procedure areas? Maybe. And if it becomes standard of care, you can do the math of how many hospitals will do robotic procedures and surgery centers that are being added that do robotic procedures, there's a -- there's a huge number of robots still to be sold. And so that's -- that's the underlying question is, will it become the standard of care, that's expected in all procedures, and we're obviously striving for that. And the industry is moving in this direction, the pace of the curve is really hard to predict. But your points, right, and what we're seeing is, we always like to have certain champions with every robot that we sell. So we don't do mass sales of robots, we don't do C-suite sales of robots without certain champions, that's just not the way we operate. And so what happens is, the robots that we do sell, get used to right away. And when they're used, the surgeon shares their experience in the surgeon rounds with the other orthopedic surgeons, and then they want to watch this procedure, they get interested, and then they'd like to use it. And then what happens is, the robots fully booked, and that that surgeon gets frustrated, and then goes to the administrator and says, I'd like a robot for my procedures. That's a dynamic that we've seen happen over and over again. And that will continue. So at this point, how many hospitals there are that do the procedures? It's a large number. And we think that there's a long, long runway. We're still in the early stages of robotic adoption, in orthopedic procedures. Sorry, I lost the quote. The second question again, Joanne, do you mind repeating?

Of course, second question that is in on seasonality, I can't we have a pandemic

Yes. So, seasonality -- sorry. On the seasonality question, Q4 is normally our strongest seasonally quarter that we have. And so November, December, it's really hard to predict this year will we see the same type of seasonal impacts? The surgeons are saying they still want to be busy hospitals and realize the importance of elective procedures to their own profitability. And so will we see the normal push? I don't know, I know, the surgeons we talked to seem to think that they're going to be busy. But it's a question I can't answer because we really, we've never been through this with a pandemic. But right now, we're not seeing any signs of something changing. It seems like there's a normal dynamic outside of a pandemic. So as long as surgeons can go to operate, they're going to operate and they've become very creative in terms of figuring out how to do their cleaning protocols. They're actually very efficient. Some hospitals are opening longer hours, or even opening up on a Friday or on the weekends to stay busy. So we'll have to watch it closely. But I really don't have any new insights to provide, I don't expect something different from what we've seen in the past.

Next question comes from Josh Jennings with Cowen. You may proceed.

Thanks for taking the questions. Congratulations on the strong recovery. Wanted to ask future medical indication question, I you're not giving timelines. But just thinking about the development of the shoulder indication should be thinking about the development they’re being exclusive for right medical extremity portfolio? And those just the push out of that acquisition do anything to the timeline of make shoulder indication?

We're not really going to get into the timeline. We believe that the robotic -- robotics shoulder is going to be compelling. Shoulder is a very difficult procedure to do as sort of more akin to partial knee than it is to total knee or total hips. And we believe it's going to be very, very compelling. We're excited about the progress that our team has made on the application and we're not going to talk yet about what implants are going to be married with the robot. But we will be sharing that at a later date.

Okay. Understood. And then follow-up of STAR ankle divestiture, just thinking about the Stryker extremities portfolio, are there any other divestitures that need to occur before the close of the deal? And then just wondering, if you could help us with that as we think about forecasting out in 2021 and making sure we account for any other divestitures outside of STAR? Thanks a lot for taking the questions, guys.

Yes. No, problem. So as we talked about, we're not going to get into too much more in terms of medical offering. Kevin mentioned the divestiture of STAR. We believe that we're on path with regulatory agencies to close the deal in November. And so we'll leave it at that.

Next question comes from Kaila Krum with Truist. You may proceed.

Hi. This is Sam on for Kaila. Thanks for taking my question. First one, I just wanted to ask about the Arrow System, Mobius -- curious how you described about a year end and now how that's performing? And then generally, how the -- capital market for imaging versus say the strength in robotics is performing? And then any impact you're seeing on call through to other businesses from that system?

Yes. Listen, we were thrilled with the Mobius acquisition, we bought a terrific technology. Our biggest challenge honestly, has been scaling up the manufacturing. So we've had very, very high demand for Mobius. It was a small company based in Shirley, Massachusetts where just large challenges really scale up and it’s the same challenge we've had, frankly, the TSO3, which is the sterilizing company that we bought, and a lot of times when we buy smaller companies, the demand tends to overwhelm us. And we have to go back to the design robustness and be able to scale the manufacturing, build new production lines. And so that's a high class problem, I would call it, we really, really pleased with the aero product, it performs extremely well. It frankly, had an increase in demand. In some cases, they were using it to look to do imaging for COVID. And so we've been frankly struggling to keep pace, but it's -- like I said, a high class probably -- we are really excited about, they also have good products in their pipeline as well. So it's a deal that -- that will be very much help correspondences for the long term. But we're still in the scale update.

Great. Thanks. And then just with resuming more spend on rep hiring into the fourth quarter, if you've maybe, maybe tease that out a little bit, we actually think about that in terms of more returned to normal rep hiring? Or are you thinking about maybe pressing your strength a little bit and getting a little more aggressive? While some competitors may be struggling? Thank you.

Yes. It's a good question, Sam. You know, I think I think it's the divisions look out towards 2021. And they're planning sort of their -- their budgets and where they can get to, it always will include new rep hiring. And so an absolutely our regular cycle is that we would get started on that in Q4. So I think that, most divisions are planning to expand their rep sales forces towards the end of Q4, and certainly on into January of next year. And that would be just part of the sort of the general territory management that we go to every single year.

Next question comes from Matt Taylor with UBS. Please go ahead.

Hi, thank you for taking the question. The first one I had, I want to follow-up on your comments on your bed launch and the bed market. And it had kind of a two part question. Really trying to understand, if you're seeing a trend towards bed market expanding and that could create more opportunity for you? And then was just hoping that you could comment on, how this new rollout to go you expect it to go into your own dates and do mostly conversion of your older beds? Or do you think there's a share game opportunity?

Yes. So in terms of the bed market itself, I think there's probably a bit of both right. So there's, there's obviously going to be the replacing cycle of beds, it's going to continue to happen. But I think the pandemic is also created some opportunity for expansion in the market as well. So I think there's going to be a mix of both of those items as we go forward. With regards to productivity, and what that's going to do for us, again, we feel really strongly about that bed and the opportunity. And there will be some opportunity, like I said, both in terms of replacing a cycle that'll fit into and then expanding into competitive opportunities as well.

And can I just ask the follow-up those really interested in your comments about standard of care robotics of Mako, and I think we've seen the knee value proposition is very strong. And I was wondering, if you also think that you can convert that to be the standard of care for hips over time and other areas that your vision that will be standard in many areas or more siloed?

Yes. No, the vision is for it to be standard care everywhere where we have an application now. I think it will take longer, you've seen the adoption of hips has trailed the knees, the adoption in partial knee which very, very strong. I think the adoption a shoulder will be very, very strong. Knees will continue. And I think it's eventually just it's just going to take a little longer because frankly, the satisfaction level of patients with hips has been quite good relative to knee, so relative to shoulder. And I think over time, total ankles, there's many other areas that robotics will play in. And that's our expectation is that it will become standard of care. Just a question of how long will that take? And what iterations are required for us to get there.

Next question comes from Richard Newitter with SVB. Please proceed.

Hi. This is Jamie on for Rich. Thanks for taking my questions. I guess. The first one I wanted ask you guys been pulled out some strength and smoke evacuation product line? I wanted to make sure I heard you correctly. Did you say that that grew double digits in the quarter? And then just kind of, digging into that a little bit what's really driving the strength in that product category? Is it something that you're really starting to see pickup now kind of just in the wake of COVID?

Sure. On the smoke evacuation, yes, I did reference that we had double digit growth in that product line. And honestly, even before COVID, most hospitals and caregivers have been very focused on safety and smoke evacuate lines up extremely well with that safety focus. I think with COVID, it's a sort of even more emphasized in terms of what that product does to the environment that they operate in, and how it contributes to the overall safety sort of platform and focus that we're seeing across all hospitals.

Okay. And then just as my follow-up. Talking about double digit growth in the neurovascular business, just curious and to get your thoughts on how sustainable you think that is with some of the new product launches you have had into 2021? Thanks.

Yes. Look, we're accustomed to seeing our neurovascular burdens through double digit growth. This is something they've been doing for -- since we acquired the business almost once the target launches got rolled out and phoenix segments started to grow. And now that we have proposed a voting stance in the U.S. market, the China markets continuing to grow very strongly. So we expect continued double digit growth for some time with the tailwind in phoenix. And now, you're really addressing quarterly stance and aspiration. We really got a -- we had a terrific management team for a long time. They continue to be humming, and we expect that business to continue to perform extremely well.

[Operator Instructions] And we have a question from Steve Beuchaw with Wolfe Research. You may proceed.

Hi. Thanks. I wonder if you could spend a bit more time on the ASC and outpatient environment. I think once upon a time, there were questions around the category that were probably rooted in some concern about pricing. But in this environment, it's clearly a tailwind. I know there was a question already about market share. But can you speak a little bit about the procedure growth trends and ASC and outpatients relative to hospitals? How much you think that's a sustainable trend beyond COVID? And how do you think about that commercially in as much as it could be a structural advantages of multi-line player versus a more concentrated line specific player? And then I do have a follow-up?

Yes. Look, first, let's start by keeping in mind that a small number of our procedures, let's call it around 10%, of our large joint spine procedures are being done in the ASC. So it's not a big part of our business yet. But the trend is no doubt headed for more of these procedures being done in the ASC, part of that changing Medicare around needs. And we expect that to happen in hips. And so it's a trend that was already happening pre pandemic, it's a trend that will accelerate going forward. There's all kinds of prognostications about how much it'll be, could it be 50% of our procedures, it's hard to predict, how fast it'll move. But we believe we're really, really well positioned for this trend. And we do intend to be a multi-line player, that's what the ASC actually wants. It's unlike how the hospital but they have a different buying pattern in the surgery center. And the breadth of our portfolio is a huge advantage. And we plan to really leverage that strength wherever we can. So, we're feeling very good about it. It's a trend that in terms of pricing, we're not seeing really any change so far in the pricing dynamics, there is a constraint around capital ASCs are much more capital sensitive. So, we do tend to have more financing involved in surgery centers, but the overall equipped to do that without Flex Financial, we've been doing financing for a long, long time. So we're feeling very good about our position to be able to win in the ASC. And we do think it's going to be more important, and the trend will accelerate.

Okay. That was actually a fantastic answer. You answered my next question. So I'll leave it there. Thank you so much.

Okay. Great. Thank you.

And at this time, I'll turn the call over to Mr. Kevin Lobo.

So thank you all for joining our call. We look forward to sharing our Q4 results with you in January. And that's concludes the call.

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