Medtronic Q3 2022 Earnings Call Transcript

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Provided by Quartr
February 22, 2022

There are 19 speakers on the call.

Operator

Good morning, and welcome to a balmy February morning here in Minnesota. I'm Ryan Weispfenning, Vice President and Head of Medtronic Investor Relations. And I'm pleased that you're joining us for Medtronic's fiscal year 2022 Q3 earnings video webcast. Before we start the prepared remarks, I'll share a few details about today's webcast. Joining me are Jeff Martha, Medtronic Chairman and Chief Executive Officer and Karen Parkhill, Medtronic Chief Financial Officer.

Operator

Jeff and Karen will provide comments on the results of our Q3, which ended on January 28, 2022, and our outlook for the remainder of the fiscal year. After our prepared remarks, our portfolio executive EPs will join us and we'll take questions from the sell side analysts that cover the company. Today's event should last about an hour. Earlier this morning, we issued a press release containing our financial statements and divisional and geographic revenue summaries. We also posted an earnings presentation that provides additional details on our performance.

Operator

The presentation can be accessed in our earnings press release or on our website at investorrelations.medtronic.com. During today's webcast, many of the statements we make may be considered forward looking statements, and actual results may differ materially from those projected in any forward looking statement. Additional information concerning factors that could cause actual results to differ is contained in our periodic reports and other filings that we make with the SEC, and we do not undertake to update any forward looking statement. Unless we say otherwise, all comparisons are on a year over year basis and revenue comparisons are made on an organic basis. 3rd quarter organic revenue comparisons adjust only for foreign currency, as there were no acquisitions or divestitures made in the last four quarters that had a significant impact on total company or individual segment quarterly revenue growth.

Operator

References to sequential revenue changes compared to the Q2 of fiscal 'twenty 2 and are made on an as reported basis. And all references to share gains or losses refer to revenue share in the Q4 of calendar quarter of 2021 compared to the Q4 of 2020, unless otherwise stated. Reconciliations of all non GAAP financial measures can be found in our earnings press release or on our website at investorrelations. Medtronic.com. And finally, our EPS guidance does not include any charges or gains that would be reported as non GAAP adjustments to earnings during the fiscal year.

Operator

And with that, let's head into the warm studio and get started.

Speaker 1

Hello, everyone, and thank you for joining us today. This morning, we reported Q3 results delivering solid earnings growth in a challenging market. We felt the short term impacts of Omicron in January, Particularly in the US, causing our Q3 revenue to fall short of our expectations. The COVID resurgence affected not only procedure volumes, But also created acute periods of worker absenteeism with our customers, suppliers, and in our own operations and field teams. Now that said, COVID infections in the US are declining.

Speaker 1

Available hospital ICU capacity is increasing and procedure volumes are picking up. While some of the impacts from the pandemic, like inflation, supply chain issues and health care worker shortages will linger, We do expect that our markets, our customers and our industry are on the path to recovery. Over the last 18 months, We've made significant changes to our operating model, moving to 20 focused operating units, as well as making major enhancements to our culture And incentives. These changes have improved our pace of innovation and our competitiveness, as evidenced by recent product filings and approvals That came faster than expected. And we're not finished driving change.

Speaker 1

We're accelerating improvements to our global supply chain and operations, Leveraging our scale to further improve quality, increase product availability and reduce costs. In addition, we've enhanced our portfolio management and capital allocation processes. Our new operating model is giving us line of sight into what is required to compete and win over the long term in each of our businesses. As a result, we're looking at our portfolio With a more critical eye, with a focus on growth and creating shareholder value. I'd be surprised if there weren't changes over the coming fiscal year, But I don't know yet if they will be smaller or more significant.

Speaker 1

Now let's look at our 3rd quarter results, Starting with our market share performance. Now market share is an important metric and a reflection of the culture and incentive changes that we're making in the company. About 60% of our businesses held or won share in the last calendar quarter. While that's down slightly From last quarter, due to some supply constraints and where certain businesses are in their product cycles, it is a significant improvement From where Medtronic was just 18 months ago. So starting with our cardiovascular portfolio, in Cardiac Rhythm Management, One of our largest businesses, we continue to build on our category leadership, adding over 1.5 of share.

Speaker 1

We're winning share in both high and low power devices. And we recently launched our Micra AV Leadless Pacemaker in Japan and Micra VR in China, resulting in international micro growth of over 50% in Q3. In Peripheral Vascular Health, we won about a point of share with Strong growth in our Abre Deep Venous Stents and Venous Seal Closure System. And in cardiac surgery, we gained over a point of share on the strength of our extracorporeal life support products. In our medical surgical portfolio, we estimate we gained share in GI, driven by momentum from the recently launched mprint HP generator In our Beacon Endoscopic Ultrasound Franchise.

Speaker 1

In respiratory interventions, despite the year over year headwind as ventilator sales Continue to return to pre pandemic levels. We estimate we gained about 400 basis points of share. We won share in premium ventilation with our Puritan Bennett 980, In video laryngoscopes with our McGrath MAC and in Core Airways with our TaperGuard endotracheal tubes. In our neuroscience portfolio, we increased our market share in cranial and spinal technologies. We're launching new spine implants that enhance the overall value Of our ecosystem of preoperative planning software, imaging, navigation, and robotic systems, as well as powered surgical instruments, all of which Are transforming care in spine surgery.

Speaker 1

In neuromodulation, we have great momentum from new products in both pain stim and brain modulation. In Pain Stim, despite the headwinds from Omicron, we estimate we gained over a point of share, driven by both our Intelis with DTM technology and Vanta Recharge Free Systems. And in Brain Modulation, while we continue to face headwinds from replacement devices, our business grew 15% On strong adoption of our Percept neurostimulator with Brain Sense technology, paired with our Sensight Directional Lead. Medtronic is the only company with sensing capabilities on our deep brain stimulators, which drove about 10 points of new implant share And over a point of overall DBS share in Q3, and we expect this momentum to continue. Another business with momentum is our neurovascular business, Where we are back to winning share, picking up about 2 points this quarter.

Speaker 1

We're seeing strength from our pipeline family of flow diverters for treating intracranial aneurysms. Our flow diversion launches in Japan, CE Mark Countries and the United States, coupled with broader portfolio growth in China propelled neurovascular to 12% growth this quarter. Now while the majority of our businesses are winning share, we have some businesses that lost share in Q3 where we are focused on improving our performance. In Cardiac Diagnostics, despite year over year share loss, we gained share sequentially for the first time in many quarters. We've made good progress increasing our manufacturing capacity for our LINQ-two insertable cardiac monitor.

Speaker 1

And we began our rollout of our Acurythm artificial intelligence algorithms, which were just enabled for all LINK2 patients in the U. S. We expect ongoing supply improvement and additional AI detection algorithms, along with new indications to expand the market and drive growth. In our structural heart and aortic business, we lost share in aortic due to supply constraints and continued pressure from our Valiant Navion recall and competitive launches. At the same time though, we maintained our TAVR share in Q3, growing in the mid teens.

Speaker 1

In our Surgical Innovations business, we lost a little over a half a point of share overall due to an acute resin shortage that impacted our flagship Lig ashore vessel ceiling This was partially offset by increased share in advanced stapling, given strong market adoption of our tri staple reinforced reloads, As well as share gains in hernia and sutures. The good news here is that our teams have improved our resin supply, And we expect to be able to meet demand in Q4. In patient monitoring, we estimate we lost a few points of share due to a difficult comparison from the strength we had last in pulse oximetry and capnography monitor sales. However, our share has been relatively consistent for the past 4 quarters. In Pelvic Health, procedures slowed this past quarter and we lost some share.

Speaker 1

We expect this market to recover and we are well positioned to compete. In ENT, we lost share for the first time in a long time, given some temporary supply chain disruptions that we expect to have resolved going forward. And in diabetes, we continue to lose share, predominantly in the U. S. Look, we're extremely focused on resolving our warning letter And bringing new products to the U.

Speaker 1

S. Market, although timing is difficult to predict. In December, CMS expanded coverage for our CGM sensors, Including those integrated with our insulin pumps, and we're pleased that this will take effect for Medicare patients at the end of this month. In the international markets, we launched the 770 gs in Japan last month, making it the 1st hybrid closed loop system available in that country. And in Europe, we continue to see success and strong adoption of our 780 gs with the Guardian 4 sensor.

Speaker 1

Next, let's turn to our product pipeline. We've launched over 200 products in the US, Western Europe, Japan and China In the last 12 months, and these are having an impact across our businesses. At the same time, we continue to advance new technologies that are in development With increased investments in R and D. We're expecting these investments to create new markets, disrupt existing ones and accelerate the growth profile of Medtronic. Now starting with our cardiovascular portfolio, we continue to make progress in cardiac rhythm management on disrupting the ICD market With our Aurora Extravascular ICD.

Speaker 1

Our U. S. Pivotal study is fully enrolled. We continue to expect CE Mark approval later this calendar year And US approval next calendar year. Our EVICD can both pace and shock without any leads inside the heart and veins.

Speaker 1

And it does this in a single device that is the same size as a traditional ICD. We believe Aurora will accelerate adoption of of EVICDs and make this a $1,000,000,000 market by 2,030. In cardiac ablation solutions, We're advancing a number of technologies to become a leader in the $8,000,000,000 EP ablation market. We're rolling out our DiamondTemp RF ablation system, As well as our exclusive first line paroxysmal AF treatment indication using our cryoablation system. We also continue to make progress with our anatomical Pulse Select PFA system, which has breakthrough device designation from the FDA.

Speaker 1

Our global pivotal trial completed enrollment back in November, and we're very excited about how our PFA system could disrupt the EP ablation market. Last month, we announced our intent to acquire Afera. Afera has several development programs underway, Including a differentiated mapping and navigation system that closes a competitive gap in our product portfolio and a focal PFA system That is a separate and complementary platform to our anatomical PFA system. We're looking forward to welcoming the Effara team into Medtronic. Moving to our Simplicity Renal Denervation procedure for hypertension.

Speaker 1

We continue to enroll our OnMed study and expect to complete the 6 month follow-up In the second half of this calendar year. We'll then submit the data to the FDA as OnMed is the final piece of our submission to seek approval for SIMPLICITY. Adding to our body of evidence, 3 year data from our OnMed pilot study will be presented at the ACC Scientific Sessions in April. In Structural Heart, we now expect to begin the limited US market release of our Evolut FX valve in Q1, Followed by full market release later in fiscal 'twenty three. Evolut FX enhances ease of use improvements in deliverability, implant visibility And deployment stability.

Speaker 1

In China, we expect to launch our Evolu ProValve this quarter, our first entry into this large and underpenetrated TAVR market. We also continue to advance our transcatheter mitral and tricuspid development programs. In our APOLLO pivotal trial for TMVR, We just had the first implant using our transfemoral delivery system, and we expect this new system to meaningfully accelerate patient enrollment. Moving to our Medical Surgical portfolio and our Surgical Robotics program. We've made progress improving our supply chain and manufacturing And remain focused on scaling production.

Speaker 1

At the same time, we continue to add regulatory approvals and expand our limited market release, Most recently in Canada, Australia and Israel. And we intend to start our U. S. Urology clinical trial soon. In addition to euro and gyne cases, surgeons in Panama, Chile and India are now performing general surgery procedures with HUGO, Including advanced cases like colorectal and lower anterior resection surgeries.

Speaker 1

And we announced earlier this month the first HUGO procedures in Europe. In diabetes, our MiniMed 780 gs insulin pump combined with our Guardian 4 sensor continue to be under active review with the FDA, With approval subject to our warning letter. When approved and launched in the US, we expect this system to be highly differentiated and accelerate growth in our diabetes business. We continue to expect submission of our next generation sensor, SIMPLARA, to the FDA this quarter. SIMPLARA is fully disposable, Easy to apply and half the size of Guardian 4.

Speaker 1

Finally, we're making progress on multiple next gen sensor and pump programs, Including Patch Pumps, although we haven't disclosed details for competitive reasons. While it will take time, we expect the technology pipeline investments we're making Will result in our diabetes business being accretive to total company growth and eventually grow with this important market. Now turning to our neuroscience portfolio, we were pleased to receive FDA approval for our diabetic peripheral neuropathy indication For our Intellis and Vanta Spinal Cord Simulators last month. This came following the FDA's rigorous review of our clinical submission And years earlier than we had previously communicated. The approval represents the beginning of a multi year market development process, Which we are uniquely suited to execute given our presence in both the pain stim and the diabetes markets.

Speaker 1

We believe that DPN market opportunity We'll reach $300,000,000 by FY 'twenty six and with an annual TAM of up to $1,800,000,000 Making DPN for SCS one of the biggest market opportunities in medtech. In addition to DPN, we also continue to make progress on Expanding indications for SCS into non surgical refractory back pain and upper limb and neck chronic pain. If that was not enough for Pain Stim, we're also excited about our Inceptive ECAPS closed loop spinal cord stimulator, Which we submitted to the FDA late last year. We expect Inceptiv's closed loop therapy that optimizes pain relief for patients To revolutionize the SCS market. Finally, in pelvic health, we're expecting FDA approval for our next gen InterStim Recharge Free device In the first half of this calendar year.

Speaker 1

With its designed best in class battery, constant current and full body MRI At both 1.53 Tesla, we expect this device will extend our category leadership in sacral neuromodulation. And with that, I'll turn it over to Karen to discuss our financial performance and our guidance. Karen?

Speaker 2

Thank you, Jeff. Our Q3 organic revenue increased 2%. While we were tracking to our quarterly guidance in early January, The impacts from this latest wave of COVID affected our revenue in the last month of the quarter. Despite the challenging revenue, We controlled expenses and delivered adjusted EPS in line with our guidance and a penny ahead of consensus. From a geographic perspective, our US revenue is flat, and non US developed markets grew 1% Given the impacts of Omicron, our emerging markets were relatively stronger, growing 7% With strength in South Asia, Latin America and the Middle East and Africa.

Speaker 2

Converting our earnings into strong free cash is a priority. Our year to date free cash flow was $4,300,000,000 up 23% from last year. And we continue to target a full year conversion of 80% or greater. And we remain focused on allocating our capital to generate strong future growth and shareholder returns. To generate strong future growth and shareholder returns.

Speaker 2

We are increasing our organic R and D investments broadly across the company To fuel the pipeline that Jeff walked through earlier, and we are supplementing this with attractive tuck in acquisitions. Since the beginning of last fiscal year, we've announced 8 acquisitions totaling over $3,200,000,000 in total consideration, Including last month's acquisition of Afera in our cardiac ablation business. At the same time, we're increasing our minority investments In companies that could become future acquisitions, as was the case with Afera. We have a commitment to return more than 50% of Our free cash flow to our shareholders, primarily through our attractive and growing dividend. We are an S and P dividend aristocrat.

Speaker 2

And fiscal year to date, we've paid over $2,500,000,000 in dividends to our shareholders. And finally, Particularly in periods where we see share price dislocation, we look to execute opportunistic share repurchases, As was the case this quarter. Fiscal year to date, we've repurchased over $1,100,000,000 of our stock. Turning to guidance. While procedure volumes are still impacted from Omicron in the 1st few weeks of February, We are beginning to see improvement.

Speaker 2

Our outlook assumes continued procedure volume recovery through March April, And we expect to be back to pre COVID levels in most of our markets before the end of Q4. Assuming that holds, For the Q4, we're comfortable with current Street consensus for our organic revenue growth of approximately 5.5%. At recent foreign exchange rates, currency would be a headwind on 4th quarter revenue of approximately $185,000,000 By segment, we would model cardiovascular at 7% to 8% growth, neuroscience at 2.5% to 3.5% growth, Medical Surgical at 7.5% to 8.5% growth, and diabetes down 6% to 7%, All on an organic basis. On the bottom line, we expect 4th quarter non GAAP diluted EPS In the range of $1.56 to $1.58 in line with current consensus. And at recent rates, We expect currency to have a flat to slightly positive impact on the bottom line.

Speaker 2

Before I send it back to Jeff, I want to acknowledge the additional strain that the recent COVID resurgence has placed on our customers and our employees over the past couple of months. I am truly grateful for the perseverance that both health care workers and our employees have demonstrated To ensure patients receive our life changing therapies around the world. Back to you, Jeff.

Speaker 1

Thank you, Karen. For the last few quarters, I've been closing by commenting on the progress the company is making in various areas of ESG, our environmental, social and governance impacts. Today, I want to highlight that we recently released our Global Inclusion, Diversity and Equity 2021 Annual Report entitled 0 Barriers. The report shares how we are accelerating our efforts to remove barriers to opportunities by creating an inclusive work environment, doubling down on removing bias, And amplifying our impact in our local communities. Our commitments to ID and E and the UN Sustainable Development Goals Compel us to solve health inequities faster.

Speaker 1

Systemic, socioeconomic, racial, geographic and even generational factors all contribute to a person's ability Or inability to achieve good health and reach their full potential as a contributing member of society. We're committed to urgently addressing barriers to education, diagnosis and treatment as the global crisis of health inequity can be solved by accelerating access to healthcare technologies. One such in equity is mortality from colorectal cancer. While colorectal is one of the most preventable cancers, low screening rates make it one of the deadliest, With mortality rates 40% higher for the Black population in the United States. In addition, Hispanic and Latino adults Or more likely to be diagnosed in later stages of the disease when it's more difficult to treat.

Speaker 1

Today, I'm pleased to announce that Medtronic is collaborating with Amazon Web Services And the American Society For Gastrointestinal Endoscopy to place GI Genius modules at facilities that support low income and underserved populations Across the United States. Our GI Genius system improves the quality of colonoscopies using AI to assist physicians In detecting both precancerous and cancerous growths. Increasing access to technology that can improve clinical outcomes through earlier and more accurate detection Can provide a significant positive impact for communities most vulnerable to colorectal cancer. We continue to look for creative solutions like this one to address health and equities. Now let me close on this note.

Speaker 1

While the pandemic and its associated impacts Have affected our revenue the past couple of quarters more than we expected. We haven't lost sight of the big picture. We've made significant changes in the company, And we're strengthening our operations, supply chain and global quality systems. We're also laser focused on capital deployment and portfolio management processes With a deep commitment to creating shareholder value. And we have several exciting growth catalysts in our pipeline.

Speaker 1

We expect to benefit as market procedures reaccelerate post omicron and as we lead in high growth medtech markets. While it's been a bumpier ride than I would have liked, and we still have challenges to work through, I'm confident in our organization's ability to accelerate and sustain our growth profile over the long term to grow at or above our markets, And as we do so, create value for our stakeholders. And finally, I want to join Karen in thanking all of our employees around the world, Who, despite the challenges we faced day in and day out, engineer the extraordinary so that we can serve our customers and patients in all four corners of the globe. As a result of your efforts, we can fulfill the Medtronic mission, alleviating pain, restoring health, And extending life for millions of people around the world. Now let's move to Q and A.

Speaker 1

We're going to try to get to as many analysts as possible, So we ask that you limit yourself to just one question and only if needed a related follow-up. If you have additional questions, You can reach out to Ryan and the Investor Relations team after the call. With that, Wynn, can you please give the instructions for asking a question?

Speaker 3

For the sell side analysts that would like to ask a question, please select the participants button and click raise hand. If you're using the mobile app, press the More button and select Raise Hand. Your lines are currently on mute. When called upon, you'll receive a request to unmute your line, which you must respond to before asking your question. Lastly, please be advised that this Q and A session is being recorded.

Speaker 3

For today's session, Jeff, Karen and Ryan are joined by Sean Salmon, EVP and President of the Cardiovascular Portfolio and the Diabetes Operating Unit Bob White, EVP and President of the Medical Surgical Portfolio and Brett Wall, EVP and President of the Neuroscience Portfolio.

Speaker 4

We'll take the first question from Robbie Marcus at JPMorgan. Robbie, go ahead.

Speaker 5

Great. Thanks a lot and congrats on the quarter. Maybe my first question, I think one of the bigger investor questions that's building here, especially with Some of the warning letter and delays in diabetes and some of the inflation pressure we're seeing with some of your competitors. Any early thoughts on how we should be thinking about fiscal 2023? There's a wide range on estimates.

Speaker 5

So I just wanted to get any early sense you had for us. Thanks.

Speaker 6

Sure. First of all, thanks for the question. I agree it's a big question. And maybe I'll turn this over to Karen to Provide some color commentary on FY 'twenty three.

Speaker 2

Thank you, Jeff and Robbie. So I would first say it's early. And Obviously, you know, we're going to give our full year outlook on our Q4 call in May. And we're working through our planning process As we speak. And we've noted before with you that there are more puts and takes than normal for next fiscal year.

Speaker 2

So let me help by sharing some broad thoughts. On revenue, we Continue to drive to our long term organic revenue growth goal of 5 plus percent for sure. Although I would say on Plus side, the plus side of that LRP may be more difficult in FY23, just given some of the challenges that we've talked about. We are, as you know, expecting really great product launches. Jeff talked about several of them on the call.

Speaker 2

And we do expect a continued rebound in procedure volumes in our markets. And as we think about FX on the top line for next This year, think about that as being a few $100,000,000 headwind at recent rates. On the bottom line, You've heard from others around the increased pressure from the macro environment. And we've got that same increased pressure On things like inflation and wage adjustments. And we noted last month that currency is expected to flip From a tailwind to a headwind next fiscal year.

Speaker 2

And we've also shared that we've got some dilution from our Afera acquisition. Those last two combined could impact EPS by a few 100 basis points. While, you know, we continue to work to offset these headwinds, we certainly don't want to shortchange our investments Growth drivers for the future. And it's those investments that are really going to help us deliver on that plus side of the 5 plus percent over the long range plan. So I would say, FY 'twenty three will be a unique and challenging year, just given the macro environment and the timing of our major And on the bottom line, we do expect to grow EPS next year, certainly.

Speaker 2

But at this stage, we don't expect it to be above revenue growth. I want to make sure though that you take away from this that we are Still very committed to our long range plan. We've got investments in quality along with the more than modest FX dilution Next fiscal year that should subside going forward. And while it's hard to predict the macro factors like inflation and wage adjustments, You know, I'm not sure they'll continue at the pace that we're currently experiencing. And obviously, as we look forward, we expect to have meaningful revenue Growth to go along with those investments that we're prioritizing, which will ultimately help drive EPS growth.

Speaker 2

So I hope that color is helpful, Robbie.

Speaker 5

Yes, that's great. And then as my follow-up, Jeff, at the JPMorgan conference, you first mentioned Maybe doing some bigger changes to the business. You mentioned it again today. I was just hoping you could give us A little flavor for what you're thinking. Is it divestitures?

Speaker 5

Is it a bigger breakup of the company? And what's the timeframe we should be thinking about

Speaker 6

Sure, Robbie. Yeah. So we're definitely looking at the portfolio more intently. I can't however, at this point, I can't really get into specifics. I will I'll say we're looking to improve our WAM growth.

Speaker 6

We're looking to improve The consistency of our growth, our North Star, to summarize it, our North Star is durable growth. And We're looking at our businesses and we're evaluating them for 1, how well they fit into the portfolio, how well they fit into our strategy. Are we the right owners of these assets? And then how we, Medtronic, add value and grow these businesses? It's still at this point, like I said at the conference, we don't know if these changes will be significant or more limited.

Speaker 6

But I can assure you we're deeply committed to doing the right things for shareholders and on all the Medtronic stakeholders. So, we intend to get through this analysis, and I think have more over the next Several over the course of the next fiscal year is what we said at JPMorgan. And I don't have any more update from that in terms of timing.

Speaker 5

Thanks a lot. Appreciate it.

Speaker 7

Thank you, Robbie. Next question, please, Wynn.

Speaker 4

Next question comes from Vijay Kumar at Evercore ISI. Go ahead.

Speaker 6

Vijay, are you there? Do you want to go to the next question and then come back to Vijay?

Speaker 8

Yes. I'm so sorry about that. Hi, Jeff, Karen. Good morning and thanks for taking my question. I guess maybe one.

Speaker 8

My first one is On the guidance comments made, which was helpful. What is fiscal 'twenty two assuming on diabetes? Did you guys have a second meeting with The FDA is the warning letter going to be de linked with the approval or how you're treating diabetes in that comment of 5 plus With Plus being difficult, is that still assuming a 50 to 100 basis points of headwind from diabetes?

Speaker 6

On the very last part of the question, I'll let Karen and maybe Sean chime in. In terms of look, the dialogue with the FDA Is ongoing. I mean, we've got an ongoing dialogue on the 780 gs approval. We've got an ongoing dialogue On the warning letter, our priority is, they're both priorities, but our first priority is to work the warning letter Issues that we've been working these, like as we talked about for 2 years now, even before the warning letter was issued. So the dialogue with the, like I So with the FDA is ongoing and it's very constructive, I would say.

Speaker 6

Karen, you want to talk about the last part of the Question there.

Speaker 2

Sure, Vijay. Good morning. It's still too early to get specific. We're in our planning process. And as we talked about before, there are a variety Of outcomes and ranges that can happen depending on the approval.

Speaker 2

We're obviously focused on getting that approval out as quickly as possible and we'll be working toward that. But too early to get specific on guidance. We'll give that guidance, including for our business units In the Q4 call.

Speaker 8

Understood. And maybe Jeff, my second question on the robot. Some early feedback seems to be positive. Have you did mention supply chain has been resolved or ramping up production, Maybe some sense for where production is, or some color on how many surgeons have been trained, what is the order book Looking like for the robot would be helpful.

Speaker 6

Yeah, maybe I'll bring in Bob here in a second to Provide some of that, more color on that. On just overall, we're making progress on the robot. Demand continues to be Strong. We continue to get additional regulatory approvals, a couple more last quarter. We did, our first surgery in Europe and are getting good feedback from surgeons there, which I think is a great sign.

Speaker 6

And the breadth of our procedures, continues to grow, get more complex. And, so we're feeling good about the, You know, kind of where the robot is, like that we've got something really powerful on our hands here and we're going to achieve our long term objectives here. And as we've said before, We anticipate a strong ramp in FY 'twenty three, but I'll give Bob, Bob, do you want to add some color here?

Speaker 9

Yeah. Thanks, Jeff. And Vijay, thanks for the question. It was nice to read your report after the time you spent with Professor Mowtri as well. And Certainly, what we've seen Vijay is we've seen some nice progress.

Speaker 9

We're installing more systems across the world. As you know, now that we have Our CE Mark approval, Jeff mentioned some of the general surgery procedures taking place and we certainly Expect to continue to expand the regulatory approvals in more countries. We're certainly Look to expand in the future to thoracic, colorectal, hernia, bariatric procedures. Obviously, HUGO was designed with all those procedures in mind, Working with all those regulatory agencies and the feedback itself has been really positive, Vijay. The open council has been The visualization, staying connected with the OR staff.

Speaker 9

And we like about that, we really think the council and our whole System designed for where healthcare is moving, which is a real kind of cross functional team based approach to physician care delivery. So Obviously, as you know, you picked up some of this feedback. The way our system is designed, it's also allowing to train multiple surgeons in parallel. And so to your question, we're training lots of surgeons. We have training centers now opened up in geographies across The world and seeing really good traction there as well.

Speaker 9

So we're going to do what we told you consistently throughout, which is Expand our limited market release into these markets and continue to make progress. But thanks for the question and thanks for spending time with Professor Moatje.

Speaker 8

Thanks, guys.

Speaker 10

Thank you, Vijay. Thanks, Vijay. Next question, please, Wynn.

Speaker 4

The next question comes from Peter Chickering at Deutsche Bank.

Speaker 11

Good morning, guys. Thanks for taking my questions. On the guidance questions, I understand that the macro environment for 2023 is pretty challenging. But as you look at both labor and material inflation, do you think that that would change your long term EPS targets? Or do you need more revenue growth to offset these margin pressures?

Speaker 11

Or do you think they can pass some of these costs on to your customers over time?

Speaker 6

Let me take a stab at that. First, there are things that we're doing. I'll let Cameron talk about some of this in a second here. But we are in addition to, we are obviously facing these inflationary pressures. And even before the inflation kicked As part of our organizational kind of new operating model, one of the areas we've talked a lot about Moving to the 20 operating units and putting more into R and D and really speeding up the pace of innovation.

Speaker 6

And I think That is working. We're getting good evidence around that this is working in terms of the pace of our product launches and some of these product launches Coming much faster than we anticipated, like we talked about on the and I talked about in the commentary, like in our pain stim market with DPN, Diabetic peripheral neuropathy approval or and I can go off on a couple other lists or ECAP submission for pain. And these are areas that we just sped things up. So I feel good about that. But another area that we had planned to address and now are accelerating Is the operations area and there's an opportunity there to get some more benefits of scale that we have and simplify Our global operations and in simplifying that, that's going to I think we're going to also invest in some enhanced capabilities there.

Speaker 6

That is going to give us a lower cost to serve, if you will, and set us up for, cost of goods sold Improvements over time. So that is going to help address some of this. You also mentioned price. And again, those plans were put in motion before the inflation, but we've been accelerating it since the inflation has hit. And then price, I mean, Price, there are we are looking more acutely at our new technology.

Speaker 6

We have a lot of new products coming out. And we are looking at the pricing of that in the wake of some of the, of this inflation. And there are select markets around the world Where I think we have the ability, we have the opportunity to improve our pricing. So we are looking at pricing as well. So both those levers, reducing our cost to serve and setting ourselves up for cost of good and better cost of goods sold And you know, over time and then the pricing that I just mentioned.

Speaker 6

Karen, do you want to add?

Speaker 2

Yeah, I'll just add a little bit. While it varies by geography, we are seeing a wage inflation in our direct labor currently of almost 9%. So that is much higher than typical. And that's just a near term headwind that we're dealing with that will impact us a bit in FY2023. And on materials right now, we're typically able to drive net material savings through productivity efficiencies and And right now, we're expecting a couple of 100 basis points of inflation on that, Just in the near term.

Speaker 2

But again, over the long term, we're focused on driving revenue growth, on driving continued cost down in expense efficiencies, pricing opportunities where we have them. So, you know, we're focused on and remain committed to that long range plan.

Speaker 11

Thanks so much.

Speaker 10

Thanks, Vito. Next question, Wayne.

Speaker 4

The next question comes from Matt Miksic at Credit Suisse.

Speaker 12

Hi, thanks so much. Can you hear me okay?

Speaker 1

Yes, we

Speaker 6

can hear you, Matt.

Speaker 12

Great. So I have one quick one on sort of your portfolio comments and then just Clarification on the 'twenty three guidance comments, if I could. So, Jeff, I think sometimes when folks ask about Portfolio changes or puts and takes to your businesses. They're thinking of Just to put it bluntly, commitment to diabetes, frankly. So love to get your thoughts on your commitment to that business, how important it is to the portfolio, Where you stand in terms of the process of getting us back on its feet.

Speaker 12

And then I have just one clarification, as I mentioned for Karen.

Speaker 6

Sure. On the comments we made about the portfolio, let me start by saying it wasn't intended to be focused on diabetes. It's A real, I guess, deep dive, I would say, on the whole portfolio, okay, and More intent than we've done in the past. Regarding diabetes, look, I'd say we are confident in our turnaround story here. I know the warning letter Didn't help, but we are confident in the turnaround story.

Speaker 6

We believe we have a solid pipeline of new technologies and some near term growth Our clear priority though is resolving the FDA warning letter and getting these new products to market, especially in the U. S, right? It's a situation when we see the Products working in other markets. We know it will have a huge impact on patients here in the U. S.

Speaker 6

As well. And We have multiple shots on goal to deliver competitive pump and CGM technology through our organic R and D, Through the Blackstone partnership and through some structured investments. And as we mentioned in the JPMorgan conference, we do have Some parts of the pipeline that we haven't provided much detail on for competitive reasons. So, we feel Wish we were further along in diabetes in terms of not having the warning letter, but it doesn't Change the narrative in our mind. We have the technology.

Speaker 6

We have the pipeline. It's a high growth market, and we feel good about it.

Speaker 12

That's great. Thank you. And then just on, Karen, appreciate the color on 2023 and understand it's we're A quarter away here from formal 'twenty three guidance, but the few 100 basis point impact on EPS you mentioned From FX and some other items, dilution from Avera. Just to put a finer point on it, That's inclusive of the diabetes impact. And also Just to make sure we have the math right, that's somewhere in the range of $0.15, dollars 0.15 to $0.20 or something like that of a headwind from those items.

Speaker 12

Thanks.

Speaker 2

Yes, Matt, thank you. Those items, the few hundred basis points that I talked about are just from The foreign exchange flipping from a tailwind this fiscal year to a headwind next year and from the dilution. So you can see the magnitude just from those 2 temporal items. And that foreign exchange flip, I think, At least at current rates, we would say is much more than modest. And so that's why we point them out.

Speaker 12

Great. Thanks.

Speaker 10

Thanks, Matt. Next question please, Wayne.

Speaker 4

Next question comes from Larry Biegelsen at Wells Fargo. Go ahead, Larry.

Speaker 13

Good morning. Thanks for taking the question. So just one on the recovery and related one on China, it looks like January was soft, given your comments at JPMorgan and the results today. So a little bit more color on what you've seen in February And the confidence in the Q4 guidance, it does imply a pretty significant increase I think sequentially. And just lastly on China, It was flat in Q3 versus growing high teens in the Q2.

Speaker 13

Any color on that and how you guys are thinking about You know, VBP there. Thanks for taking the question.

Speaker 6

Sure. Larry, on the first part of the question, Yeah, Omicron impacted cases and it caused broad based absenteeism, Right. And we use the word absenteeism to separate it from healthcare worker shortage. The healthcare worker shortage, I think, is more It's going to last a bit longer into FY 'twenty three versus the absenteeism and that's driven by All the things you've heard about, like burnout, people leaving the workforce versus absenteeism was more short term and acute caused by Just the broad number of, Omicron cases and absenteeism applies not just to healthcare workers, but, Our own employees working in factories and our distribution centers, our suppliers, it was broad based. And so that absenteeism Plus the COVID cases suppressing elective cases in hospitals, that peaked The second half of January and into the first half of February.

Speaker 6

And trends are now favorable as we highlighted and indicated with our Q4 guidance. And we think procedure volumes will improve throughout March April and back to pre COVID levels by the end of our fiscal Q4. However, you still have these chronic staffing shortages that will be from what we're hearing from hospital administrators persistent to FY23, but how or into 2023, sorry. But they are they will be mitigated by these traveling or temporary staff for the hospitals who are just paying more For these employees and technologies like remote monitoring and telehealth. And so we think that those mitigants will allow them To get back to the normal levels, but it will maybe limit them from going 110% or 120% Pre COVID levels like we saw in prior waves, prior to Delta and Omicron.

Speaker 6

So that's how we're seeing it. And it does imply A big improvement here in Q4, but we don't see that hospitals have the capacity to kind of Handle 110%, 120% kind of levels like we've seen in other waves. So I hope that answers that question. And then maybe on the China piece, I'll turn that over to Karen.

Speaker 2

Yes. Thanks, Jeff. On China, it was a bit flat in Q3 and we did see some regional tenders happening or beginning to happen in the trauma space. And as we see those tenders happening, the channel slows down, their buying. So that just happens in advance.

Speaker 2

But just on VBP in general in China, we do expect the government to focus on the top 10 medical device products by public insurance spending. And as you know, we've been through stents and other industry players have gone through large joints. I mentioned we're now seeing this regional trauma tender, and we see 2 more potential national tenders around these tenders, including timing. But, but just so you know, if we look at our spine and stapling business in China, our gross exposure Is somewhere between 1% to 1.5% of the total company revenue. And based on what we experienced with stents, There should be offsets to that ultimate number so that the net would be less than the gross that I mentioned.

Speaker 2

Because we've got pull through of products and we'll obviously be working those. We are anticipating at least one of those Tenders to happen in FY2023. And these are among the things, that put pressure On the plus side of our long term 5% plus goal for next year. So hope that's helpful.

Speaker 13

Thank you so much, Karen.

Speaker 10

Thank you, Larry. Thanks, Larry. Next question, Wayne.

Speaker 4

The next question comes from Joanne Wuensch at Citi.

Speaker 14

Good morning. Can you hear me okay?

Speaker 6

Yeah, sure, Joanne. How are you doing?

Speaker 14

I'm doing okay. Thank you for taking the question. I want to just build off of Karen's last comments on The plus side of the 5%, somewhat for next year, but even the year after that, what needs to happen in order for you to get there? And specifically, I do have a number of investors who think or say, they can't get to the plus side without a diabetes turnaround.

Speaker 6

Well, I think what I like about our position right now is the breadth Of the portfolio, the strength of the current portfolio and the strength and breadth of the pipeline. And we have several drivers. There's a lot of focus on, obviously on HUGO and we talked about that and we're Feeling good there and certainly, by that time, we'll work through some of these manufacturing and supply chain issues and We're feeling really good about the quality of what we have here and the impact that HUGO is going to have. We'll get the Ardian data readout As well. And I'll come back.

Speaker 6

We talked about diabetes. But beyond that, you've got things like, and I'll just I'll start in cardiovascular. You got our EVICD coming. We see that market to be $2,000,000,000 to $3,000,000,000 And then our Cardiac ablation solutions business there for AFib, we've got PFA. Of course, our DiamondTemp rollout We'll peak and we've got PFA coming.

Speaker 6

In MedSurg beyond Hugo, SI is hitting a nice Part of its product cycle here, there's a number of products that will have an impact coming in SI. And then our neuroscience portfolio just across the board Is well positioned. You heard the commentary about neuromodulation with DPN and pain, ECAPS and pain And that strength on strength because our DTM is doing well there. You got DBS with the sensing and the closed loop. Pelvic Health, that market continues to be a Strong growth market and we've got a great product line up there.

Speaker 6

ENT will be adding Intersect and I really believe our spine business is poised With the broad base of enabling technology and just where that market is going, it definitely favors us. And then you heard today that neurovascular Is back to gaining share. Over the years, we've relied on that. So it's a broad base of technology. And I think with the new operating model, I expect it to keep refilling that pipeline up.

Speaker 6

That's the focus. That's what I'd say. We feel good about, as Karen said, there's more puts and takes next year than normal for sure. And she's gone through that I think in good detail. But we're committed to the long term plan and it starts with this top line growth.

Speaker 6

And based on the broad nature of it, we feel good. And then getting back to diabetes, remember, we do have the 780 gs with the Guardian Force sensor. We will have a new sensor beyond that in that timeframe with Simplera. And that Simplera sensor could also be paired with Our pen, from Companion and creating a whole new vector of growth for our diabetes business there with smart pens paired With our sensor, so there's a number of drivers there and you take it all, it doesn't all need to happen To get to that 5% plus once you get past FY23.

Speaker 2

And Joanne, I just want to emphasize from my seat That we are really confident in that 5% plus over the long term. And it is because it's not dependent on any one thing. But it's the strength of the pipeline that Jeff mentioned.

Speaker 14

Excellent. Thank you so much.

Speaker 10

Thanks, Joanne. Next question, Wynn.

Speaker 4

The next question comes from the line of Danielle Antalffy from SVB Lyric.

Speaker 6

Hey, Danielle.

Speaker 15

Oh, so sorry. Can you guys hear me okay?

Speaker 6

Yeah, we can hear you just fine.

Speaker 15

Okay. Great. Thank you so much and appreciate all the commentary you guys provided As we look out over the next fiscal year, just a quick question as you think about the ramp in major new product launches. So you've Talked about Hugo a little bit here, but there's obviously also RBN. And just to follow-up on Joanne's question, I guess, as we think about fiscal 24 and beyond, so beyond the next fiscal year.

Speaker 15

How we should be thinking about that ramp? I know we're waiting for the data, but has anything changed as far as Thinking about contribution for some of these major new product launches. Thank you so much.

Speaker 6

Well, on the Ardian question, maybe I'll pull in Sean Salman here to provide an update on Ardian.

Speaker 16

So, Jeff, I think the data readout on Ardian, We're expecting now in that kind of late fall, early winter timeframe of this calendar year. But there may be a milestone in between now and then to give you more confidence. We have the 3 year data from the pilot trial on meds Being presented at ACC this year. And why that's important is that'll be the first time we've had randomized data with long term follow-up. So the question around how long does the effect last, it doesn't wear out, that's going to be really important for Pairs.

Speaker 16

It's an important inflection point. But And we remain very confident. All the body of evidence that we've had for RTN has continued to be very consistent. And we're making preparations To really go after a blockbuster launch here.

Speaker 6

And another one that we've mentioned a little bit Commentary, Danielle, that maybe I'll have Brett Wall comment on is, two things in pain. Our pain business already well positioned with our DTM, but The diabetic peripheral neuropathy and the ECAPS submission, do you want to comment on those two things, Brett? Because I think together pretty meaningful.

Speaker 17

Yes, sure, Danielle. These two things are pretty meaningful. We received the diabetic Peripheral neuropathy approval about 2.5 years before we anticipated that. We think that's A market that, as Jeff said, the commentary is going to grow to $300,000,000 pretty quickly. We are well positioned with that.

Speaker 17

And The data there that we submitted is very strong data and it's reflective of the other data that has been In addition, We submitted late last year our ECAPS filing and ECAPS is a closed loop algorithm that will be utilized in SCS. And we are back to gaining share really across the neuromodulation portfolio, but in SCS in particular with DTM And now with the embodiment of our stimulation programs with this sensing capability to close the loop and allow for really more effective So the entirety of this portfolio is set up as the markets recover and as procedures recover, We wind down Omicron for share gain and growth across the field with more effective therapies In this entire area.

Speaker 6

Yeah. And so, you know, just last comment on that. I mean, look, obviously they're both great opportunities. But the other piece that I really like about them is just how we did this, right? These, in both cases, you had a small, you know, smaller, And in one case with eCAPS, a startup, smaller focused companies that innovate, you know, that signaled the innovation here.

Speaker 6

And, You know, historically, we haven't moved that fast to, and now we're moving at a much faster pace. And I just love the way we put these focus teams on there, gave them this challenge in both of these instances to move fast, don't sacrifice quality, But move fast and this is the type of thing that we want to see. We're starting to see across the portfolio with the new operating model, With the leaders we have in place, with some of the new leaders we brought in from outside the company. And like I said earlier, Also now beyond innovation, moving on to really Improving our capabilities and our end to end supply chain to make sure that it's reliable And it sets us up from a cost position as well. So like where the company is headed, like those two examples in particular.

Speaker 15

Thank you so much.

Speaker 7

Thanks, Danielle. And I apologize, we're not going to be able to get to all the analysts today, But we do have time for one more question. Can we take that, Wynn?

Speaker 4

Our final question comes from Rick Wise at Stifel. Go ahead, Rick.

Speaker 18

Thanks, Sven. Good morning, Jeff. Hi, Karen. Jeff, maybe just given your commentary about And the appreciation for your stepped up R and D spending and your comment about using a portion of Cash flow for continuing M and A sort of in a sense an extension of R and D.

Speaker 14

Can you Talk a

Speaker 18

little more, just give us your latest thinking on how your reflections on your targets. Are there a lot of opportunities? There are a lot of opportunities to increase your minority investments. Where are you? What are you prioritizing for the calendar And the next several years, what are you targeting?

Speaker 18

Just any updates would be very welcome. Thank you.

Speaker 6

Sure. Rick, great to hear from you. Thanks for that question. I'll answer it a couple of ways. 1, yeah, this is separate.

Speaker 6

These tuck in acquisitions and venture investing, that's separate from the broader portfolio Comments I made earlier. This is what we view part of our everyday business here is doing tuck ins. And so a couple of things I'd say. One, we have stepped up our venture investing. We separated our venture team maybe 2 years ago from our M and A team to have more focus.

Speaker 6

We have separate operating mechanisms with these, with this team, that Karen, myself, and several others from the executive committee participate in. And so we have stepped up those investments. And a lot of those investments, some of them are just debt or equity, but some of them Or more structured investments that give us opportunities down the line. So that is significantly up. And then on the acquisition space, I was hoping, like I said in prior calls, that during COVID, evaluations would Go down a bit and present opportunities.

Speaker 6

That didn't happen initially, but valuations have come down a bit. And our pipeline Is fuller than it has been over the last 2 years. You see the Intersect deal, That intersect deal for ENT that we announced and the Afera deal for our ablation solutions business. Those are the type of like acquisitions In that $1,000,000,000 multi $1,000,000,000 range that have, in the case of Intersect ENT will have an immediate impact Because they've got meaningful revenue, the AFFAIR deal, it will take a little bit longer, as it's still earlier in development, but hugely impactful. What I like about that deal is how it repositions our, really strengthens our ablation business there by providing the map nav and complements Our PFA offerings.

Speaker 6

So, you know, we're seeing things, you know, across the board, if you will, particularly, I would say A lot of interesting things in neuroscience, a lot of interesting things in the cardiology space as well. So that's how I'd answer that question.

Speaker 18

Thank you very much.

Speaker 7

Thanks, Rick. Jeff, please go ahead with your closing remarks.

Speaker 6

Okay. All right. Thanks, Ryan. Okay. Look, thanks everybody for the great questions.

Speaker 6

And, we appreciate certainly appreciate your Support and your continued interest in Medtronic. And look, we obviously, Karen outlined some of the puts and takes that we have We're working through. But we also have, like I ended on, some extraordinary opportunities in the marketplace. And you Combine that with the changes that we've made in the company and continue to make that I think you're having a meaningful impact. I'm confident in our ability You know, to work, move past these, work through these challenges, move past these challenges and deliver on these opportunities and deliver on That plan, that long range plan that we've outlined.

Speaker 6

And we're steadfast in our commitment to deliver durable and higher growth, Full stop. So look, we hope you join us for our Q4 earnings webcast, which we anticipate holding on May 26th, where we'll update you on how we finish the fiscal year and then even a more detailed look ahead at fiscal 2023. So with that, Thanks for tuning in today. Please stay healthy and safe and have a great rest of your day.

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Earnings Conference Call
Medtronic Q3 2022
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