Stryker Corporation (SYK) Earnings Call Transcript & Summary

Great. Thanks, everyone, for joining us this morning. A pleasure to have with us the team from Stryker. We have CEO, Kevin Lobo, with us this morning. And from Investor Relations, I think in the background, we have Jason Beach and [indiscernible] in the background. So with that, Kevin, thank you so much for taking the time this morning.

Well, thank you, Vijay, and happy to be here.

If I just look back at this year, Kevin, this execution from Stryker team, it's been phenomenal. I mean that third quarter for close to 10% organic, really, really strong. Maybe just talk about what you're seeing on the macro front right now, how the procedure volumes, utilization trending, anything could be watch out for macro front?

Yes. Well, thanks. Certainly, you saw us, we actually raised the range of our organic sales growth. So that tells you that we feel very confident about Q4, at least. And then going into next year, the order book is extremely strong for all of our capital equipment, be it large capital or small capital. And what we're seeing with elective procedures, hip and knee surgeries in particular, is a nice, steady tailwind. So things picked up meaningfully in September. That's continued into October, November. And I think that will continue throughout the rest of '23 and even into '24, we'll have this sort of modest tailwind. In the past, when we've had these periods of strength with -- based on pent-up demand, you've had these spikes and then kind of a settling down back to normal market growth. I think because of the staffing challenges the hospitals have, they just can't spike the way they used to, but they'll be this gentle tailwind. And we feel great about our position, obviously, given our strength in robotics and cementless for knees. And then in hips, obviously, the Insignia Stem is off to a great start. It's about 40% of the way through its long. It takes time to do these full implant launches, as you know, but that combination with Mako -- Mako Hips now at 30% of the hips is pretty dramatic because it had flatlined at 20% for four or five years. So we're pretty encouraged about the momentum that we have both in hips and knees, and we expect that to continue.

Fantastic. And I think a couple of points you mentioned out there Kevin just on the utilization front, Europe has been a little [indiscernible], some of the [indiscernible] of developed markets has a softening because of stacking challenges. But we haven't seen that ortho [indiscernible] on your business. Anything on utilization or China lockdowns that's not worthy here.

Yes. The only area -- the only pockets of disruption that are, I'd say, meaningful are really in Asia Pacific. So obviously, China, as you know, still in the zero COVID mindset. And then Australia, for us, is a big market, and they're still having issues with cancellations of procedures and they haven't been able to work off their backlog. And then as you know, the U.K. has a giant backlog. They're actually doing pretty good volumes. So the volumes are fine, but they have a giant backlog that built through COVID, and that's our country with the highest market share for us in Europe is the U.K. based on the [indiscernible] and historic strength. But Europe for us was very strong in Q3. We expect another strong Q4. We're not seeing much in the way of slowdowns. Again, they are gated by some challenges around staffing, just like the U.S. is, but we see healthy volumes there. We saw healthy volumes in Q3. You saw our international growth outpaced U.S. growth, and that has been happening, frankly, since 2019 for Stryker. So our globalization efforts are finally bearing good fruit. And that's in spite of China, of course, being very challenging.

Understood and helpful commentary up there on cancellation. Anything to call out on cancellation fronts here in the U.S.? Any change?

No. Like I say, the volumes are getting better progressively, more stable. There are cancellations that occur here and there, but it's not really a problem right now. I think it's -- the market is healthy. And the hospitals are learning to equip [indiscernible] you have the RSV, of course, you have difficult flu scenario. COVID still around, but it's not nearly as disruptive as it was even two quarters ago. We're seeing pretty good momentum and pretty sustained momentum.

Understood. And since you brought up Insignia Hip [indiscernible] maybe let's start there. U.S. had 30% growth here in third quarter. It's really, really strong. And you mentioned -- now I was not aware about Mako is now 30%. What -- is there something different about Insignia the implant itself that's driving this acceleration?

No. So there's -- it's a combination. We launched the Hip 4.0 software, if you recall, roughly a year ago, maybe a year, 1.5 years ago. So that software took time to sort of get that adopted and updated throughout our Mako footprint. So that was the first step. That software was a very important change. Made the registration faster, the information on pelvic tilt, and then that combination with Insignia, which, obviously, was a necessary gap in our portfolio for a fit-for-purpose Direct Anterior stem. Of course, you can use the Accolade II for Direct Anterior, many of our surgeons do, but this collared stem was a gap in our portfolio. And so that combination has increased the demand for our products and the growth of our Hip business. So it's not just one thing, it's the two together that are very, very powerful. And when we launched Insignia Stem, we launched it with compatibility with Mako. And so we're seeing the stem being adopted both robotically as well as in manual procedures. But again, only 40% of the way through, we did prioritize competitive accounts for the early parts of this launch, and we'll eventually be able to launch that through the rest of our systems. And in some cases, some surgeons may choose to switch from accolade to Insignia. But for now, we're very focused on competitive business. In some cases, they were using our cup but not our stem. That's obviously the first place you're going to go when you launch a new product is to convert that Stem business when they're already Stryker loyal customers maybe using our knees, using our cups, but not using our stems because they wanted a collared stem.

And if I go back few time, Kevin, back in the day, I think when Mako knee was seeing these kinds of trends, we were seeing 100, 200 basis points of share gains. Is that something we can expect on the hip side as well?

Well, we're excited. I don't know if it will be to that degree, but we expect to gain share. I don't think there's any question. We should be growing faster than the market. We had a period of time when we did that when we first launched Accolade I and II. And then we grew slightly below the market for a period of time because of that gap in our portfolio around the direct interiors. So we will outpace the market. We will [ repeat ] to the same degree as knees, hard to say. I don't know that it's as compelling the robotic offering for hips. If you have a large deformity, it's fantastic. The larger the deformity. So we're seeing that in Asia Pacific, where hips, as you know, the hip volume is similar to knees or even higher in higher number of hips than knees in Asia Pacific, but they also have larger deformities. And the larger deformity, the more Mako makes it an obvious benefit for you. So I don't know if I give you those kind of numbers, but definitely outpacing the market, and we've done that in Q3, and we will do that for the foreseeable future.

Understood. And how should we think about Hips overall in the franchise? Is that market perhaps mid single digit volumes and with a little bit of share gains high singles, is that the right way to think about Hips?

Yes. That's a good way to think about it.

Understood. And then shifting gears to on the knee side, again, really a really strong year. How much of this is just actually [ bearing fruit ] to an increase in your installed base where make maintenance installed base growth versus growth in first system utilization.

It's a bit of both, to be honest with you. So obviously, through the pandemic, we continued to have large numbers of installations at Mako, all the way through the pandemic and that's bearing fruit for us, obviously, with over half of our knees being done on Mako. And the utilization is increasing Hospitals are buying their third, their fourth, their fifth, their sixth Mako. So the demand is absolutely -- continues to be already very strong, and they're very happy when they do the procedures. And so that, frankly, ASCs were selling a lot of our Makos in ASCs, a higher percentage this year than we have historically of our Makos are going into the surgery centers and high demand for that, which is great. So the surgeon doesn't want to have to switch when they move from their hospital to performing their procedures in the surgery center. They want Makos in the surgery center. So we expect this to continue. It hasn't slowed down. The percent of procedures using Mako continues to climb. The percent of knees done cementless continues to climb as well. And as you know, we've had a long history many, many, many years with cementless and a giant head start versus the competitive set on cementless as they're just starting to launch their products or relaunch some of their products.

And correct me if I'm wrong, but I think the last period was maybe half of these are now cementless. Is that where we are?

That that's where we are, roughly half, and it continues to climb. Now it's not climbing as rapidly as Mako utilization, but it's continuing to grow, which we're very excited about. And the accounts that have Mako index above that so they're well north of 50%. If you have a Mako, you tend to do a lot more cementless than if you don't. So there's a synergy between robotics and the beautiful cut that you get from our robot with -- you can do 1 millimeter recuts with the robot. And so that type of precision, combined with cementless, it's a very, very beautiful combination.

Understood. And then I know there were some installation delays in the third quarter. Has that situation changed since third quarter? And is there something like you sort of issues here [indiscernible] in third quarter?

Yes. So let me -- supply chain issues really didn't impact Mako. So our supply of Mako is fine, the supply chain. The supply chain issues really affected medical significantly, even though they had good organic growth of 13%, it would have been a lot higher if we had more product and instruments, it affected those two divisions the most. It's affecting a little bit of everybody, but it's most acute in medical and then secondarily in instruments. Mako have -- we have good supply of the electronics and the components. The issue is just being able to get the Makos placed in the accounts and in solving the accounts and it's getting better. I would say fourth quarter is going to be certainly better than the third quarter. It's going to be a good quarter for Mako. The demand is still strong. They're being pushed out for various reasons, delays of construction staffing availability. There's various reasons that they're getting pushed out a little bit, but we still feel very strong about our offering. Obviously, we have competitive offerings that they try side by side. So now that we have every major player with an offering, it has slowed the purchasing cycle a little bit as they assess the different technologies, but we love our chances.

And now that you mentioned all [ curative ] offerings are there in the market. Have you seen any change in win rates, make or win rates, when do you go win business? And what do you think [indiscernible] are being here in adoption of robotics in large joints?

Yes, I'd say we're still in the early innings, so sort of less than -- we're not yet at the fifth inning, we're somewhere in the third and fourth inning probably is the way I described it. I think robotics will become standard of care in orthopedics as it has become standard of care in other as you know, prostate or other procedures has become standard of care. It will take time before that happens, but we're still in the early stages. And our win rate is just as high as it has been historically. So the reason I say that is the win rate is they're buying a new piece of capital and they're going to assess different technologies, right? That's -- if there are some accounts, let's say they're a loyal competitive account. Loyal surgery who does not want to change implant. And so that's an account where we don't really have a fair chance, right? So I'm not worried about that business. It's when they are open to technologies and we get to try our product side by side, our win rate is very high. And we frankly encourage our customers to try the products because they sometimes complain about the that we're charging. And we say, well, try them side-by-side. Just do a side-by-side comparison. And we know we have the winning solution in the marketplace.

That's helpful. And I know there was some transition here from a selling perspective, moving from an upfront sale to a higher lease -- are we through with the transition here? And should we start seeing those numbers being reflected from a growth perspective in '23?

Yes, there's a lot of dynamics at play here. So in terms of the shift towards more financing, all of our ASC deals are financed because you have partial physician ownership. They don't have the same capital budget as a hospital. So as our ASC penetration of Mako increases, the proportion that are in ASCs, you're going to see financing increase. But that still provides tremendous value over the lifetime of the deal. And so we're very really agnostic as long as they're paying for the robot. How they pay for it is not so important to me. Even though I might lose a little bit of ortho -- other ortho revenue in the short term, it pays itself over the life of the deal. And these deals tend to be five to seven years long. So they're long deals and that's great for us because we lock up the volume over that long time frame, fixed pricing over that entire time frame versus the annual 3-year grind that we have in the hospital environment. So we are very excited when we were able to do these ASC deals. And certainly, our Sports Medicine business is the largest beneficiary of these deals because every ASC does for its procedures. They may not do shoulder. They may not do foot and ankle, they may not do spine, but they always do sports. And then they always do large joints.

Understood. And switching back to supply chain, your comments you made on order books and backlog, et cetera. Where are we in that supply chain? Can you give us a sense on -- are things improving? Is the backlog being worked? Or where are on that front?

Yes. We have not worked down our backlog. It's actually built up over the course of this year because the orders keep coming in and we just are not -- we are unable to ship out of the backlog in medical and instruments. So we have a backlog that's well north of twice the normal size that we have. And it's just -- it's getting better but at a rate that's clearly not as fast as I would like. It's slowly getting better. It's the way I describe it. And we hope that we'll start to be able to eat off our backlog going into next year, but our sales teams are continuing to win deals. If you think about ProCuity, ProCuity bed is doing exceptionally well from an order standpoint, I just can't I can't get enough parts to ship it. Same thing on the defibrillator side, where we're having tremendous order strength, just an inability to get the product that we need either it's the availability or the extortion pricing sometimes is so seen that we're just like now, we're not going to buy. We're going to have to wait a little bit. We are taking it on the chin in the margin as you see and we're willing to sacrifice some margin to be able to provide the product to our customers, especially life-saving products. That's not something we want to sort of hold them hostage on. But we -- that's getting better just at a slow rate. I wish I could tell you when we'll be out of the woods, I don't know yet. But we're not doing as much spot buying. So the spot buying, we're still doing some, but we peaked around June, July and that's starting to come down, which is great because over six to nine months later, you're not going to see those high cost P&L as they bleed through inventory. So the spot buying -- reliance on spot buying is definitely getting better. We're still doing some -- I hope that we completely stop sometime in the first half of next year. That's my hope, but we're not there yet.

I understood. And just one on this backlog, Kevin, when you said it's twice as large as historical cycle. I think, historically, backlog has given you strike rate three to six months of visibility. Does it mean you have now visibility to six months plus given the size of this backlog?

Yes, I would say I have visibility up to nine months easily because of the size of the backlog. And the backlog -- it even includes the booms and lights in our Endoscopy division. So it's really across a lot of our portfolio. It's -- supply chain is not the reason for Mako. Mako stay stable from a supply chain standpoint, but virtually most of the other capital parts of our business are challenged from a supply chain standpoint, different degrees of challenge. I think Endoscopy is a little less than -- and Medical by far is the most. So even though we had great growth, it would have been incredible growth if we could have been able to supply more products. So looking forward to being able to start to eat into that backlog, but as I say, the orders keep flowing in. And we're not getting any order cancellations. So all of our orders at Stryker have POs that are signed by hospitals, customers. And sometimes, we do require deposits, which are nonrefundable. So there -- that tends to be a pretty strong commitment from a hospital, and we don't have any history of orders being canceled in our business, and we're not seeing any signs of that so far. And the balance sheets are still pretty strong for hospitals, even though their margins are being squeezed. They can withstand tight margins or even slightly negative margins for a period of time. So as long as it doesn't -- it isn't prolonged, I think we're going to be fine. We're largely a recession-proof company. No one is completely recession-proof, but we're largely recession proof. And we don't have this -- the reliance on large capital is much less than it used to be at Stryker because of the diversification through our acquisitions over the past decade. Large capital is about 9% of our sales. And even that large capital, Mako, for example, there's still a strong demand for that. And that's one of the elements of our large cap.

That's extreme helpful a lot of commentary, Kevin. Just on the CapEx, some of your peers have. It's been a mix in messaging to be honest. Some sounded cautious, others sounded cautious, but now we're sounding positive. What differentiates Stryker there? Is this a process of sharing gains for Stryker that's driving these order's trend?

Well, I think our portfolios are a little different, first of all. If you think about something like Mako, we're still in the early stage. If Mako was maybe more mature and its robotics was more mature than the notion of replacing or upgrading you could probably delay that. They're still -- we're just earlier in our cycle. So let's put that Mako thing to the side. In the other areas, for sure, in Medical, there's a lot of share gain. And there's a bit of, I would call it, pandemic induced demand. So something like defibrillators, there -- you go through COVID and you want to make sure you don't have -- you run out of things. You want to make sure you have the number of defribilators you need. So we're getting a lot of new demand plus our sales force has done an exceptional job creating new demand. So having defibrillators in every single NYPD car, that wasn't the case a year or two ago. So they're winning big orders and new orders and the demand is just extremely strong. So a little bit of this safety -- this focus on safety is a bit of a tailwind for Stryker. We have a lot of products in our safety portfolio, whether it's defibrillators or whether it's smoke evacuation in the operating room. So that's provided a bit of a tailwind for us. And something like ProCuity, that's pure share gain, where we have a fantastic product that's winning in the marketplace. We are winning in accounts that we never sold beds in before. And so that will continue. It's year two of the launch and a bed launch typically year three, year four is where it takes time to -- these are big sales, the sales cycle is longer for bed that then it is in other product categories. But pretty excited about that being able to win new business.

That's extremely helpful. On the ProCuity comments here, is there any way any historical context here and what those share gains gain? Is that a pipeline share gain or any way to quantify what it means?

Well, unlike stretchers, in beds, we're #2, right? And we have been closing and gaining share in closing on the #1 player. So we have plenty of share to gain. It's not like power tools or some other categories where we have very, very high market shares. In this case, we look forward to one day becoming #1 in this category, but we have plenty of room to gain share, not just in the MedSurg category, but also in the ICU area, where we were kind of a distant #2 in ICU. Part of the ProCuity launch, there's multiple models. And then the high-end model of ProCuity does play very well in the ICU, where we've historically been a very small player. So we're pretty excited. There is plenty of market share that we can go after given that we are #2 in that category.

And how large is this that category, Kevin, when you look at the surgical beds across the different settings?

Well, we don't really sort of give out all these sort of micro numbers, but it's a big, big category, no question, not just in the United States, but also globally. And we are also not a very strong player historically in the international markets. And so this is very, very, very big market. I don't think I'm going to give out numbers unless Jason wants to jump in. Do you want to jump in, Jason?

No. I think what you said is well said there, Kevin.

Jason was in the hot seat up there for a second, but back on U.S. instruments. That's another one area, which was impacted along with Medical. But some of these products that you call out, Kevin, like smoke evacuation, Steri-Shield, seem to be like the secular trends that could last for a while.

Yes. Smoke evacuation for sure is going to be a giant market, right? Again nine states that are now mandating legislation for smoke evacuation and already, seven more states have it pending legislation to mandate smoke evacuation. So that's an enormous tailwind. And this is a business that's been growing very strong double digits for Stryker and will continue. And market it's just new market growth, which is pretty exciting. And even some of the European countries are starting to really look into this. It's -- I'm not saying they're mandating it everywhere yet, but it's starting to happen. So we're really excited about being well positioned in this space.

And any sense on what that opportunity could mean either from a market perspective or for Stryker?

Well, I mean, this is all new market growth, right? So this 20% or 30% growth in smoke evacuation I see that continuing for the next five years. It's not a giant piece of our overall portfolio, but it's exciting. And you'll see the instruments business will start to become a much more meaningful part of instruments. So Instruments, everyone thinks power tools. Well, things like Steri-Shield, things like smoke evacuation are going to start to really provide a great tailwind for growth within instruments. And just since I mentioned power tools, just wanted to let you know. I don't know if we've announced this at all publicly yet, but we have launched System 9 in the U.S., just about a week or two ago. So it's in the early stages, obviously, but a little bit ahead of schedule. So we are initially planning for that to be a Q1 launch. It is now launched. It's been launched in Europe and now launched in the United States. So that's -- it's nice when the launch is a little bit ahead schedule. And then the camera were slated for Q2 and then the LIFEPAK defibrillator end of the year. So we're not going to see a lot of benefit in '23. We'll launch in Q4 outside the United States. And then inside the United States, hopefully, the beginning of '24. It's a little harder to predict because it's a PMA and it goes through a different FDA process. So it's less predictable than the 510(k) type products.

That's helpful commentary. On the System 9, is there some historical analogy, Kevin, on what a new launch would look like and what the curve would look like?

Well, certainly, we have high adoption. Customers are used to it. They're used to moving from system 6 to 7 to 8 to 9. And typically, year two tends to be the largest spikes. But you get a nice lift in year one and then an even bigger lift in year two. That's kind of typically how our power tool launches have gone. Customers are able to switch pretty quickly. What's a little bit different with this launch is as you launch this product, you need to buy new batteries. So in the past, you've always had -- you've been able to use the old batteries. So this is a little bit like Apple when you buy an Apple phone and you have to get a new charger. And that's because we have a fantastic solution for batteries now with incredibly important data for customers coming out of the batteries and preventative maintenance and so it will -- there's value provided, but it does provide a little bit more of a lift probably on the top line than we've had historically because historically, you could buy the handsets, but still use the old batteries. This time, you're going to have to buy a new battery set as you buy the new hand pieces. But -- so we're excited about it. It's going to provide really good benefits to customers. They're used to it. They know that changes are going to happen that's going to be lighter. It's going to be better to use. It's now in terms of battery life and even autoclaving, better capabilities than we've had before. So it will be a very successful launch as they have been in the past instruments. This is their bread and butter. They know how to do this.

Any way to quantify what battery or -- what's your install base is for us to get along around this opportunity?

That's a level of detail we don't normally provide. You know that power tools is the largest portion of instruments. And when instrument says their power to launch, go back in history, that division typically will get double-digit growth. They're normally either a high single-digit or low double-digit grower. When you have a launch year, we tend to like to expect kind of that low double-digit growth for the division. It carries -- it will carry the growth for the division. So that's a little bit of color I can give you.

That's helpful context for sure. On the camera, again, I think the last time you launched a camera that segment grew, like teens, I think, if I'm not mistaken. Should we think about the current camera is in line with historical launches? Is anything different about the new camera?

No, just think about it like another terrific new product. It will be higher priced, obviously. I'm excited. The faster we can switch on cameras, the better. Because the product availability of chips is much better and our margin profile -- because right now, we're getting squeezed on our margins because of the high price of components. So our margin profile will return to a healthier margin profile, the faster that we can switch customers, but customers are going to get terrific benefits, amazing resolution, better lighting for some procedures like sports and neuro where our prior camera was fabulous for general surgery, but not as fabulous in some of the other procedures. We've addressed those issues. So the customers are going to love this new camera. There's no question. And again, they're used to the upgrade cycle and the ICG visualization is tremendous. I had a chance to see the cameras out in San Jose recently to see the camera. It looks awesome. So we're very, very excited. And even the cabling of the cameras makes it even more reliable than prior cabling. So this is going to be a great solution. And as you say, the double-digit growth kind of expectation when you launch something -- is something that we -- that we'll look forward to. Again, year two tends to be a little bit bigger than year 1, but our sales teams know how to do this upgrade cycle. And we've been gaining share, frankly, in cameras, especially in Europe, where our Endoscopy business tended to be more of a sports business. It's now fast becoming a very strong business where actually we're not #1 in cameras five years ago, we're now #1 and really starting to pull away. So we're very excited about it.

That's fascinating. And why should the margins I think [indiscernible]

Right now, we're paying high prices for the components, and we'll go back to paying more normal prices. So 1688 margins have been squeezed based on the supply chain, the unfortunate reality of today's supply chain. When you launch something new, you get sort of -- you get back to normal pricing for your input costs. And so that margin profile will improve. Now you won't see it in the price, but you'll see it in the gross margin.

I understand, understood. No, that's helpful. And then one on -- the last one here, you did bring up life back. But that's a newer segment. I haven't really focused on it. How big is that product line? And how should we think about the launch here?

Yes. Again, we don't disclose the different categories, but I would tell you, Physio-Control -- when we bought Physio-Control. So Physio-Control -- LIFEPAK was the biggest piece of Physio-Control. It also had the LUCAS product for automatic chest compression and then the lower-priced defibrillators, right? So when I say LIFEPAK, I'm talking about the big LIFEPAK defibrillator that's used in the back of the ambulance and a little bit in hospitals, not the ones that are on the walls in gyms and those are also defibrillators, but those are lower price points. And we do sometimes use the life pack brand on those, but what I'm talking about is the big professional defibrillator. That was the largest portion of Physio-Control. Physio-Control when we bought it was about $500 million of revenue. And we have grown at double digits since we've owned it, which I know surprises people because when we did the deal, it wasn't so popular, but it really fits beautifully within the Stryker portfolio. And so take the $500 million add double-digit growth since we've owned it. LIFEPAK, the professional is the largest portion of that $500 million. So I'm not giving you specifics, but hopefully, that helps a little bit.

No, that's 75%. No, I remember Physio-Control and certainly, I was one of those -- I wouldn't call a skeptic, but certainly, it seems outside your comfort zone, we're at it's fast we see double-digit growth.

I think the way to think about when we do deals, the technologies, we'd like to solve customer problems. And we like to be providing technologies into our existing call points as much as possible. And we were already selling in the back of the ambulance. We were already selling in the ICUs and in the hospitals. And so it's just a new technology to the same call point. And we merged our emergency sales force. So the sales force that was selling power cots. We merged that with the Physio-Control sales force, and that's the largest portion of the sales are made in the emergency. So think about it, it was really an emergency product, an emergency medical technician product. And that's what Stryker does very, very well is our distribution sales force network is they know how to perform and they know how to sell. And so we just brought new technologies to existing call point. And maybe we didn't explain that as well when we first did the deal. But that was the deal logic for us and why we felt we were uniquely positioned to be able to grow this faster than just your average other med tech company because we're already in the call point.

That makes total sense. And then that segues nicely to this recent acquisition of Vocera. what was the call point synergy here, Kevin? And again, there was some transition here some of the fact that called out, what changed?

Yes. So that's one where we've known the company for a long time, and they run side by side with our medical sales force, same sales force that sells ProCuity as well as the warming products in the hospital, the surfaces in the hospital. So that sales force, this is a business that's in -- that's been put together with Medical, run by Jessica Mathieson, who's a phenomenal leader. Our entire Medical division is just loaded with great talent. But anyways, so they -- we run alongside the Vocera team. We've now connected Vocera to our ProCuity bed, and we're showing customers. So if you lower the bed rail, for example, the badge of the nurse gets an audible warning -- voice warning to the nurse telling them that the bed rails been lowered that patient number this in this room, which is pretty amazing. And so we've been able to do that pretty quickly. We've only closed the deal earlier this year. and to make that connected already with ProCuity is pretty exciting. But we see this as a real amazing platform that we're going to attach much more products to not just Stryker products, but even categories we don't play in. We've been approached by one outside company to actually attach their product to Vocera, which is really exciting. It happened sooner than I would have expected, but we want this to be an automated workflow technology play for our customers. As I mentioned before, we like to solve customer problems. This takes cognitive load off nurses. This reduces errors. It's another safety play in the hospitals. The retention rate is extremely strong. Yes, we had a little bit of a hiccup on sales. So we had flat sales growth versus the prior quarter because we really want to move more of the business to the cloud. It's better for us. It's better for our customers, better for cybersecurity. It's better for a lot of reasons, long term. So sometimes when we do deals, we take a little bit of short-term pain that benefits us longer term, as you saw with Mako, as you've seen with some other deals, we're still going to grow the business over time. We still feel widely positive on the technology, but I think fourth quarter and first quarter will be flattish sales, and then we'll get back to the double-digit growth that we had because the order book is still strong, but we -- moving to the cloud requires us to go through more cases with the IT departments of hospitals. And if they insist on staying on-premise, then, of course, we have an on-premise solution, we'll do that. But it's -- it will be -- it's easier to manage from updating from an ongoing maintenance cost to serve and frankly, benefit to the customer. If it helps them as well as us if we can do this migration to the cloud and the cloud offering is a strong offering.

And that migration, I think, could take nine months. I think it's what you've said in the last...

What we said is, look, we're still selling most Vocera. We're not -- sales growth is won't go negative, but it will be flattish rather than the 15% to 20% growth that you -- we were accustomed to seeing and that -- it's an intentional sort of effort on our part.

Understood. And then one on U.S. Neurovascular. I think that's another area where you...

You like to pick the soft spot, Vijay?

No, no. We went through a lot of our positives [indiscernible].

No. So look, it's been a challenging year. There's no two ways about it. And the biggest part of the challenge, frankly, is the [indiscernible] it's all been a [indiscernible] by the way. Hemorrhagic has been very steady. So the growth in hemorrhagic and we're the market leader in hemorrhagic has been strong. It's the [indiscernible] segment that has been surprising. So the market has slowed down. I can't put a finger exactly as to why the market has slowed down. We think it has to do with just the patient profiles of the people who passed away during COVID that a lot of those patients potentially could have been candidates for stroke as they were with [indiscernible] as well. Just looking at the demographics and patient profile. So that probably explains it. I'm not sure, but that's our best guess. And then you have new competitive entrants as well, companies like Imperative Care [indiscernible] et cetera. who are coming into the market for -- mostly for aspiration, a little bit for sent retrieving because FDA relaxed their requirements. So the -- so that's the other factor, but it's secondary to the market. It's like where does this market go? And it's a market where we're still treating a fraction of patients, and it should come back. I'm bullish long term on Neurovascular. It was our fastest-growing division for -- my 10 years as CEO for the entire time, and it's still growing extremely well outside the United States, both [indiscernible] as well as hemorrhagic. So I'm still bullish long term on Neurovascular. But yes, it's been a more challenging year. A little bit of a puzzling year in some degree related to the market.

I have a portable MRI company who thinks they might extend the stroke treatment window [indiscernible] send the details of Jason post this [indiscernible] and if I roll all of this in that, Kevin, how are we thinking about fiscal '22? I mean the comps matter by end of this year was really, really strong. Should that be concern any other variables we should be thinking about for fiscal '23?

For '23, well, let me give it in two ways. So on the top line, I feel bullish. I'm feeling we're going to continue to have a really good year next year. Our order book is very strong. We have this sort of gentle tailwind of procedural benefit, and then we have a new launch cycle of products. So I feel very bullish on the top line. As it relates to gross margin, I think you're going to see stress in the first half of the year for sure, and it will get better in the second half of the year. Recall that the real impacts for us started more in Q2. So Q1 was not a terrible year for gross margin. So if you think about your comps, look, Q1 is not going to be pretty from a gross margin standpoint. We have all these high-priced spot buys that are going to bleed through the P&L. It will get a little bit better in Q2 and then Q3, Q4 will be healthier. So I kind of think of gross margin stepping up over the course of the year, and we're not out of the woods on the margin squeeze. It's going to be a bit more challenged again next year, but certainly a lot better year on the bottom line. We mentioned we expect to have strong earnings growth. How do I define strong? Well, stay tuned. We'll tell you at the end of January, what we mean by strong, but certainly not looking to -- it won't be like 2019, but it will be a heck of a lot better than this year.

Understood. Anything on FX, how we should think about FX impact?

Yes. Look, I think it's -- you saw the negative impact this year, I think, $0.35, $0.40, something like that. Look, if rates, it depends how rates move between now and January. But right now, just looking at the way it is right now, you probably have a similar kind of negative effect more pronounced in the early part of the year. Again, so the first -- a little bit more bad news for the first half year-over-year when you think about the comp. But then, obviously, if the rates have been pretty negative in the second half of the year. So the second half of the year would be more flattish from an impact next year versus this year.

Understood. And then maybe in the last few minutes here about, Kevin, if I had to sort of look at the Stryker strategy here. It's really but not remarkable. But as you think about those adjacencies for Stryker [indiscernible] spreads. How is the deal funnel pipeline looking like? Is that -- again, for asset valuations being where they are, is this a more conducive environment for M&A activity?

Well, look, we like the fact that valuations have come down in potential targets whether those owners believe this is reality yet or not to be determined. So we -- obviously, this timing of this drop and the fact that assets haven't really traded too much has been good for us because we've had to pay down debt, the $3 billion that we purchased for Vocera as well as $5 billion for Wright Medical. So we've been in debt paydown mode. Obviously, we announced [indiscernible], that's one deal we've announced. It hasn't closed yet, but we announced that that's kind of smallish deal, but we want to get back to doing deals. Once we get the debt levels to a better place then we're on target right now in terms of our debt pay down. So going into next year, certainly, we'd like to get back to doing deals at some point next year, getting back towards a more normal rhythm. And as you say, if the asset's value stay in a lower mode than certainly some assets that we liked that were unaffordable may be affordable. So we're hopeful. We don't like the fact that the market valuations have hurt us, but we -- but the -- it is good from the standpoint of some of the companies, especially the ones that are not making money. High growth, not making money, those have been hit harder than the people who are high growth and profitable. So stay tuned. We certainly have a list of -- our divisions are all still working on deals. They didn't slow down their efforts pursuing targets. There are tuck-ins that every business has a list of deals they want to do. And then we already talked about there's a few adjacent spaces that we like that we continue to survey and hope that we can land the plane in the next year or two with one of those other adjacencies.

I can give Jason I'm bringing out this Christmas shopping list in the back. I think -- in the last quick 30 seconds, I know you guys have made strategic investments on the balance sheet and the inventory levels. Free cash flow version has come down. When should we expect that to get back to that 80% level?

I think we're going to give our guidance in January, obviously, but we're pretty committed. I think next year, you'll see us back in that normal kind of cash flow range -- free cash flow range.

Fantastic. I think with that, we're at the end of time. Kevin. This is extremely helpful, informative. Have a wonderful holiday season.

Okay. Thank you, Vijay.

Bye now.