Medtronic Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 21, 2023

There are 19 speakers on the call.

Operator

Hello, everyone, and thank you for joining us today. We reported our Q3 results this morning and we executed to deliver a top and a bottom line that were ahead of our guidance and Street expectations. We are urgently forging the path to durable growth and there are many proof points of our progress in these results. Our cardiovascular and our neuroscience portfolios had strong high single digit organic growth as we launched new products and demonstrated continued strength in our established market leading cardiac rhythm management and spine franchises. And at the same time, Some of the recent revenue headwinds that have held back our growth are subsiding, including product availability in businesses like Surgical Innovations, cardiac diagnostics, aortic and ENT.

Operator

The aggressive transformation at Medtronic is advancing. We're focused on reducing complexity, enhancing our culture, improving capital allocation and portfolio management and upgrading our global manufacturing operations and supply chain capabilities. At the same time, we're progressing on our plans for significant cost reductions. These are aimed at partially mitigating the continued impacts from for conditions such as inflation and FX on our profitability and cash flow. These cost reductions also create room on our P and L so that we can increase our growth investments.

Operator

And I'm very encouraged by the rebound in our revenue growth, despite procedure volumes remaining a little softer in a few markets and and volume based procurement in China. We are confident in delivering durable revenue growth over the coming quarters as recent revenue headwinds continue to dissipate and we execute across our businesses. So let's take a closer look at our Q3 results. As I highlighted at an investor conference last month, we're thinking about our portfolio of businesses in 3 groups: highest growth, synergistic and established market leaders. So I'll start with our established market leaders, a group of our largest businesses that make up about half of our revenue.

Operator

Both our Cardiac Rhythm and Spine businesses had really good quarters, growing 8% 5%, respectively. In CRM, we continue to see strong market adoption of our micro leadless pacemakers, which grew 14% and our defibrillation solutions business grew 7% as replacement headwinds are moderating. And just last week, we received CE Mark for our Aurora Extravascular ICD. In Cranial and Spinal Technologies, we delivered another strong quarter with 6% growth in core spine, including 12% growth in the United States and 8% growth in neurosurgery. This is driven by our market leading ecosystem of able enabling technology and the associated pull through of our best in class spinal implants.

Operator

From our AI enabled surgical planning platform to our patient specific and differentiated spine implants to our imaging, our navigation and robotic technologies, we're differentiating ourselves with spine surgeons around the world. Turning to our Surgical Innovations business, SI grew sequentially as we made solid progress recapturing the share that we lost due to supply challenges over the last three quarters. Year over year, SI declined as a result of expected stapling VBP tenders in China, but excluding China sales, SI grew 5% in Q3. Look, surgeons around the world prefer our advanced surgical products and we expect the momentum we're seeing in SI to continue. In particular, in our leading advanced energy franchise, we're seeing strong adoption of our recently launched cordless SaunaVision 7 and we're preparing to launch our recently approved LiguSure XP.

Operator

So we're on the right path with our established market leader businesses. And at the same time, we're advancing our position in high secular growth medtech markets. These businesses are contributing about 20% of our revenue today and collectively growing above our company average. We're investing disproportionately in these businesses and expect them to become an even bigger part of our growth over time. So starting with structural heart, while the TAVR market continued to be impacted by healthcare staffing challenges and COVID in Japan, we drove 11% growth in Q3, including 12% growth in the United States.

Operator

We're seeing great physician reception for our Evolut FX system, which just completed its 1st full quarter of launch in the U. S. Evolut FX combines industry leading durability with enhanced and predictable valve deployment. And in addition, Data was presented during the quarter at PCR London Valves, showing Evolute FX's commissure alignment has improved significantly, which is important for coronary access and valve hemodynamics. Now looking ahead, we will continue to bring Evolut FX around the world and we are currently seeking approval in the Japanese and European markets.

Operator

In cardiac ablation solutions, we grew 3% globally as provincial China VBP tenders wait on our results. Outside of China, CASK grew in the high single digits, including low double digit growth in the United States on the continued strong adoption of our leading Arctic Front cryoablation technology. We're also advancing what we believe will become the leading pulse filled ablation portfolio. And in 2 weeks, highly anticipated data for our pulsed AF pivotal trial will be released in the late breaker session at ACC. The trial is evaluating our pulse select PFA catheter in both paroxysmal and persistent patients and this will be the first results from an IDE trial in the PFA space.

Operator

And we're on track to be one of the first companies with a PFA catheter in the U. S. Market. We also continue to make progress on bringing our Aferra mapping and navigation

Speaker 1

platform and Sphero9 catheter to

Operator

market as we completed enrollment form and SPHER-nine catheter to market as we completed enrollment in our pivotal trial during the quarter. SPHER-nine can perform high density and deliver either PFA or RF energy all from the same catheter. And given Sphero9 is a focal point PFA catheter, It is highly complementary to our PulseSelect anatomical PFA catheter. Finally, our CAS business just launched the AccuCROS transseptal access system with a 0 exchange workflow and the only system approved for both mechanical and RF crossings. So when you think about our ARCTIC front cryo solution, our DiamondTemp RF catheter, our PFA catheters, our left heart access solutions and our Faramapnav system.

Operator

We're assembling a leading ecosystem of technologies to meaningfully increase our participation in the fast growth 8,000,000,000 EP ablation space. In surgical robotics, we're making good progress as the 2nd major player in this exciting space. We continue to see positive sales momentum with the rollout of our differentiated HUGO robotics system in many international markets. And we started our U. S.

Operator

IDE trial for our urology indication during the quarter. Given less than 5% of surgical procedures globally are done robotically, we expect our surgical robotics business to become a meaningful growth driver for Medtronic. In neurovascular, we grew 9% and would have grown a couple of points more if not for the China VBP. We continue to see very strong growth in several categories, including flow diversion, aspiration in stent retrievers. Given stroke is the number 2 cause of death globally and there is still very low therapy penetration, we see a long runway for high growth in this market that is approaching $4,000,000,000 And in diabetes, we continue to see strong international growth offset by declines in the U.

Operator

S. Where we lack our latest products. We remain focused on resolving our FDA warning letter and are ready for reinspection. We also remain in active review with the FDA on our submission of the MiniMed 780 gs system with the Guardian Force sensor. Outside the U.

Operator

S, our diabetes business grew 18% on continued strong sales momentum of 780 gs and Guardian 4. The 7 80 gs is now launched in over 90 countries, up from 60 last quarter. We're seeing strong CGM attachment rates, which drove CGM growth of 34% outside the U. S. We continue to invest heavily in assembling our ecosystem of durable pumps, smart pens, hatch pumps, sensors, algorithms and customer service with multiple programs under development, all with the intent of restoring strong growth of our important diabetes franchise over the coming years.

Operator

And in our synergistic businesses, we also had strong performances across several businesses. We grew double digits in cardiac diagnostics as we ramped up production of LINK2. In neuromodulation, we grew 12% in pain stim and the market continues to recover. And our GI business grew high single digits on strong adoption of GI Genius, which uses artificial intelligence to help physicians detect polyps during colonoscopies. With that, I'll turn it over to Karen to discuss our Q3 financial performance and our guidance.

Operator

Karen?

Speaker 2

Thank you, Jeff. Our 3rd quarter organic revenue increased 4.1%, exceeding our guidance and representing a significant acceleration from our first half results as we begin to put the acute supply chain just behind us. Our non GAAP EPS of $1.30 landed above our guidance by $0.03 on higher revenue growth and increased interest income and $0.06 if we take into account a larger currency headwind than expected at the beginning of the quarter. Looking at our revenue from a geographic perspective, U. S.

Speaker 2

Grew 2% and our non U. S. Developed markets increased 6%, even with a 3% decline in Japan as COVID affected procedure volumes. Excluding Japan, non U. S.

Speaker 2

Developed markets increased 8%. Emerging markets grew 5%, impacted by an 8% decline in China from COVID and VBP provincial tenders in stapling, cardiac ablation and neurovascular. Outside of China, emerging markets actually grew 17%. I would also note that China represented 110 basis point headwind on our total company growth, which highlights the strength of the recovery in our other markets. VVP has affected us more than many of our competitors, given the size and breadth of our business in China.

Speaker 2

However, we do expect that we are now through the majority of the impact. Our adjusted gross margin declined in the quarter as we faced impacts from inflation and currency, with currency driving about a third of the change. These declines were expected and a result of inflationary measures that occurred 2 to 3 quarters ago. Our incurred manufacturing variances have continued to be significant in the past few quarters. And as they roll off our balance sheet onto our P and L, we expect continued gross margin pressure in Q4 and next year.

Speaker 2

The gross margin impact translated into a decline in our adjusted operating margin as well. Although this was partially muted by expense control and the benefit of our currency hedging program. Our balance sheet remains strong and we continue to execute our enhanced capital allocation and portfolio management work. Balancing future growth investments with returning a minimum of 50% of our free cash flow to shareholders, primarily in the form of our dividend. We see strong opportunities for organic growth investments internally, leading us to target R and D growth atoraboverevenuegrowth.

Speaker 2

And we continue to focus on supplementing our organic investments with tuck in acquisitions. We've also announced this fiscal year 3 businesses we intend to separate that account for about 8% of our revenue. And we're making progress towards completing those transactions. We expect to close our Renal Care joint venture with DaVita here in the Q4 and continue to progress with the separation of our patient monitoring and respiratory interventions businesses, which we expect to occur sometime in the second half of next fiscal year. We have also closed on acquisitions that will contribute to our growth in the years ahead, including AFFERA, which expands our presence in cardiac ablation and Intersect ENT, which adds unique sinus implants to our ENT portfolio.

Speaker 2

We have driven these moves to not only focus and streamline our portfolio, but also to improve our weighted average market growth rate over time. Now turning to our guidance. Given our top and bottom line beat in the 3rd quarter, We are raising our full year revenue growth and EPS outlook. On the top line, we expect our 4th quarter organic revenue growth to be in the range of 4.5% to 5%, which is unchanged from what was implied by our second half guidance that I gave last quarter. I would note that our organic growth guidance excludes the impact of currency and revenue from our Intersect ENT acquisition.

Speaker 2

And it also now excludes revenue from our Renal Care Solutions business as we expect the separation to occur during the Q4. If recent exchange rates hold, foreign currency would have a negative impact on our 4th quarter revenue of $165,000,000 to $215,000,000 Taking into account currency, Intersect ENT revenue and the partial quarter of Renal Care Solutions revenue, our guidance would imply reported revenue in the range of $8,200,000,000 to $8,300,000,000 We are also maintaining the 4th quarter revenue growth segment expectations that were implied by the back half guidance I gave last quarter. We continue to expect cardiovascular to be up 5.5% to 6%, Medical Surgical to grow 2.5% to 3%, neuroscience to increase 6.5% to 7% and diabetes to decline in the low single digits, all on an organic basis. On the bottom line, we continue to drive significant expense reductions to partially offset the impact of inflation and foreign currency. Given our Q3 $0.03 beat, we raised the lower end of our fiscal 2023 non GAAP diluted EPS guidance by 0 point 0 $3 to the new range of $5.28 to $5.30 including an unfavorable currency impact of approximately $0.21 at recent rates.

Speaker 2

For the Q4, we expect non GAAP diluted EPS to be in the range of $1.55 to 1.57 At recent rates, FX is about a $0.09 headwind to 4th quarter EPS. While we won't give guidance for next fiscal year until our Q4 call in May, I did give some color on last quarter's call and we'll remind you of it today. We're encouraged by our recent progress on revenue growth. At the same time, current macro factors and our imperative to protect R and D investment are expected to create significant EPS headwinds next fiscal year. At recent rates, FX is a few $100,000,000 tailwind to fiscal 2024 revenue and an approximate $0.27 headwind to EPS, which translates to a 5% headwind to EPS growth.

Speaker 2

While inflationary pressures are starting to moderate, we still see significant mid single digit inflationary impacts on our cost of goods sold. As wage and raw material price increases continue to roll off our balance sheet and into our P and L. We are working to partially mitigate these headwinds through significant cost reductions, but both inflation and currency and to a lesser extent interest and tax are all looking to be headwinds that reduce our earnings power in fiscal 2024. I would summarize by saying that as we navigate this period of increased macro headwinds, we will be driving disciplined cost reduction. And we are committed to investing in our future growth drivers and our turnaround as we firmly believe these important investments are necessary to drive durable revenue growth and long term value creation.

Speaker 2

Before I hand it back to Jeff, I want to take a moment to thank the thousands of employees across Medtronic who delivered this quarter. You are executing with excellence and accountability, leveraging our scale with differentiating capabilities and managing our resources to accelerate innovation. It is because of your efforts that we will create a durable growth company powered by our people as we continue our mission driven work of alleviating pain, restoring health and extending life.

Operator

Back to you, Jeff. Thank you, Karen. Now before we open the lines for questions, I'll make a few closing remarks. Last quarter, I noted that our aggressive agenda to transform this company would take time. And that's still true, but I hope you'll take away that we are operating with a high sense of urgency, which you can see reflected in our results this quarter.

Operator

We're reducing our complexity, enhancing our capabilities and augmenting our management team with new leaders that bring an outside diverse perspective. We're also exercising decisive capital allocation and portfolio management, devoting more capital to high growth opportunities and divesting non core assets. There is an intense focus from me, our Board, our management and our employees to create a company with sustainable growth that you can count on. We're in attractive markets with growing populations globally that can benefit from our therapies. And we fully expect to deliver durable revenue growth and turn our scale into a long term competitive advantage.

Operator

And through this process, create tremendous value for our shareholders. Now let's move to Q and A. We're going to try to get as many analysts as possible, so we ask 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, Brad, 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 will 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 Kew Dellara, EVP and President of the Diabetes Operating Unit Sean Salmon, EVP and President of the Cardiovascular Portfolio Brett Wall, EVP and President of the Neuroscience Portfolio And Bob White, EVP and President of the Medical Surgical Portfolio, will pause for a few seconds to assemble the queue.

Speaker 4

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

Speaker 5

Great. Congrats on a nice quarter and good morning. Maybe I could start and I appreciate, Karen, you're not giving formal guidance, But I was hoping you could discuss where the OpEx cuts are coming from. It sounds like you're going to continue to invest in R and D. So what exactly are you cutting?

Speaker 5

How aggressively are you cutting? Will this prevent any of your competitiveness on the top line? And then I'll ask my follow-up as well. The Street has you at 3% EPS growth for next Do you think that's the right place for us to be based on your comments today? Thanks.

Speaker 2

Yes. Thanks for your question, Robbie. When we look at our higher cost environment that we're facing, like many companies you've seen recently, we really have to evaluate our full cost structure and look for opportunities to reduce both spending and cost. So we're in the midst of that right now. We expect to drive a significant expense reduction to help partially offset the headwinds that we're facing and the investment that we believe we need to make.

Speaker 2

When we look at next fiscal year, I'll just give you a little bit more comments on it. I know there's a desire to give EPS guidance early, but we're still working through our plan. And there are more than a typical number of moving pieces. So that's why we're sticking to our normal timeline of giving guidance in Q4. But when we look at revenue, we grew 4.1% in Q3.

Speaker 2

And our guidance for Q4 implies sequential improvement. We expect we've said that we expect to drive greater revenue growth in 2024 than we have in 2023 and we've said that we're focused on delivering durable mid single digit revenue growth over the longer term. So we like the progress that we've made recently both on our recent revenue growth performance and on important things in our pipeline to drive that revenue growth. And we always have said that we believe our WAMGR is in the mid single digit range. But as we move down the P and L, we've got this delayed inflationary impact on our gross margin that you've seen this quarter and that will continue into next quarter in FY 2024.

Speaker 2

We've seen inflation, the pressures on inflation beginning to improve, but as you know that's got a delayed impact on our P and L. We also have currency interest and tax that are macro headwinds as well. And obviously, we've talked about The fact that we're going to continue to drive investments to drive the long term growth and turnaround of this company. We're still in the process of seeing how all that nets out with our significant expense reduction. And obviously, we're going to give guidance on our Q4 call in May.

Speaker 2

But we have said that this will be a tougher year on the bottom line where

Speaker 1

our earnings

Speaker 2

power will be significantly reduced. Hope that helps.

Speaker 1

Thanks, Robbie. Next question please, Brad.

Speaker 4

The next question comes from Larry Biegelsen at Wells Fargo. Larry, please go ahead.

Speaker 6

Good morning. Thanks for taking the question and I'll echo my congratulations on a nice quarter here. I'd like to focus on China, which declined high single digits in Q3. Can you talk about what you're seeing there in terms of Procedure volumes coming back and the VBP headwind, you gave a lot of helpful color in the JPMorgan slides on the percent of your the headwind in the first half and the percentage products impacted in fiscal 2023 and fiscal 2024. I guess what I'm trying to understand is, what overall China growth fiscal 2023 and fiscal 2024, how much of a headwind will that continue to be with VBP.

Speaker 6

And how does it impact your ability to grow mid single digits in fiscal 2024? I heard Jeff, you talk about durable growth a lot this morning. Should we be thinking more like 4% to 5% next year because of the VBP headwinds? Thanks for taking the question.

Operator

Yes. Thanks, Larry. Good to hear from you and thanks for the question. Obviously, China is a big one for us. And yes, I'll turn it over to Karen to answer some of the kind of the details on the headwinds what we're seeing here recently.

Speaker 2

Yes. So just it's hard for us to parse out this quarter the impact of procedures in VBP. So we're not doing that. But we have said on VBP that we expect to be 50% done with the impacts of VBP by the end of this fiscal year. And as we move into next fiscal year, we still do have some VBP to come, but we expect to be 80% done by the end of next fiscal year.

Speaker 2

So this quarter we had a VBP impact from stapling and cardiac ablation and a little bit in coils from neurovascular. And as we look ahead into next fiscal year, we still do have some stapling provincial tenders coming And we've got a little bit more in neurovascular and some in some cardio businesses, including cardiac rhythm, structural heart, aortic, peripheral vascular. But again, we're the majority finished by the end of this fiscal year and we've got a little bit more to go next fiscal year.

Operator

I mean just to clarify one thing, I mean we think that 80% of our portfolio, as we've Taking a step back could be impacted by VBP and that will all we're 50% of the way through and the remaining 30% will get in FY 2024. We don't think the remaining 20 will be impacted, certain things that are nuanced or under the radar screen. And what we're doing here is taking out some of our selling and marketing costs in China to offset the lower prices and because this business is now more contracted through these VVPs. So the government is living up to the volume commitments from those VVPs at these lower prices. The discounts have gotten lower as they've gone on.

Operator

I think the Chinese government has realized that MedTech is not exactly pharma and we have more selling expenses than maybe pharma does because I think they modeled a lot of this off of pharma based on my with Chinese government officials. So that's good. And we're basically we'll reset our business and grow from there. And so FY 2024 will be another year where China is a bit of a headwind. We factor that into our guidance.

Operator

We're taking on expenses and we'll rebase our business and grow from there. So a lot of thought, a lot of conversations with Chinese government, a lot of thought here, look, we're comfortable with our strategy.

Speaker 1

Thank you, Larry. Next question please Brad.

Speaker 4

The next question comes from Vijay Kumar at Evercore ISI. Vijay, please go ahead.

Speaker 7

Hey, guys. Congrats on the front and thanks for taking my question. I had a 2 part and I'll ask them upfront. When you look at Q4, what is changing sequentially here, Karen? Because when I look at 3Q, Unit 4 percent organic despite MedServe declining, continued diabetes headwinds and China headwinds.

Speaker 7

So in Q4, what are these three pieces? What are you assuming for those 3 buckets? And I think you mentioned the renal impact in Q4. Could you specify that? And Jeff, to you I understand you've not given fiscal 'twenty four guidance, but when you think about the incremental changes, right, What are the positive tailwinds and negative headwinds?

Speaker 7

Is China still declining in fiscal 2024? What happens with diabetes? Is that on the plus side or minus side? And any other plus and minus at a high level would be helpful.

Speaker 2

Yes. Vijay, let me take the first part of your question. In terms of our Q4 revenue ramp, When we gave our second half guidance last quarter, we expected sequential improvement from the Q3 into the Q4. And obviously, we're still expecting sequential improvement. That's going to be driven by continued consistency of supply, which we expect, which has already improved across the portfolio and will continue to improve.

Speaker 2

We also have some recent product launches like Evolut FX and HUGO, which will continue to ramp. You may recall we have our Harmony valve, which will return to market as well. And then we've also got Some launches into new markets like diabetic neuropathy that will begin to take some hold. And we've got reduced headwinds from things like vents and VBP in the quarter. You asked specifically about Renal Care.

Speaker 2

We do expect to close that joint venture with DaVita in the 4th quarter. So we simply noted that when we guided so that we didn't force you all to change your models mid quarter. We just put it in now. Hope that helps.

Operator

Just to finish off that just to highlight one thing in Karen's commentary there, a big one will be continued turnaround of our Surgical Innovations business. That was really hit hard, as you guys know, by the supply chain issues. You saw a nice sequential improvement from Q2 to Q3 and you'll see another improvement from Q3 to Q4. And that Karen mentioned supply chain issues subsiding, a big area where you'll see that manifested is in surgical innovations. When you look at FY 2024, well, let's start with some of the known risks.

Operator

You highlighted China VBP and Karen I already talked about that a bit. That will still be an issue as we go from the 50% of our portfolio that's done in FY2023 to another 30% that gives us 80% by the end of FY 'twenty four. So that will be a headwind. I don't know that we've said whether China is growing or shrinking, but it's definitely not growing at our historic double digit again next year. The other and look, there's still work to be done on supply chain.

Operator

I mean, it's our supplier it's The supply chain out there is still a bit fragile, although every quarter it's getting better for us. And but as you look at some of the momentum, like you've seen from us from Q1 to Q2, Q2 to Q3 and then implicit in our guidance is a nice acceleration come from Q3 to Q4. So we're excited about the happy with the momentum. And as we look into FY 2024, some of the specific businesses, You mentioned diabetes. We're optimistic we're going to get 780 gs on the market here in the U.

Operator

S. And that'll have a nice impact on diabetes plus continued performance in Europe. So that should be assuming that happens, that should help accelerate some of the growth in diabetes. Surgical robotics is doing really well and as we move into FY 2024, we'll have a a bit more scale and a bit more impact on our numbers. Cardiac ablation solutions, I'm sure we'll get some questions our mapping and navigation system, as well as our various PFA catheters.

Operator

You start to we'll start to feel some impact from them and continued strong performance across the neuroscience portfolio, I think, highlighted the CST or Cranial and Spinal Technologies business as well as You'll see continued strength in ENT. We'll anniversary the Intersect acquisition at some point that goes organic. So those are some of the things that we look at as in FY 2024. But it's there's some, I think, broad supply chain recovery, especially in SI and then a couple of highlights like I mentioned, CAST, Surgical Robotics, diabetes in the U. S.

Speaker 1

Thank you, Vijay. Next question please, Brad.

Speaker 4

The next question comes from Joanne Wuensch at Citi. Joanne, please go ahead.

Speaker 8

Thank you very much and good morning and nice sequential growth there. I have two questions. One is specific to the spine business. It was particularly strong this quarter. And I'm just a little bit curious about what you're seeing is driving that and how you think about it going forward?

Speaker 8

And then the other one is a little bit more esoteric. I heard the word urgent Or urgently a couple of times throughout the early presentation. What does urgently forging mean? And how does that translate to sort of milestones that we can look forward to? Thank you.

Operator

Well, thanks Joanne for the question. Maybe I'll start with the second one. Look, there is the word urgent, there is a lot of major change that we've got going on across the business. And I think it's important for people to understand the depth and breadth of those changes. And I know there's a desire to see things move quicker and yes, we're in some ways encouraged and we're encouraged by the progress, but we'd like to go faster as well.

Operator

But the speed of our progress of getting the top line growth and adjusting our cost base to reflect the new reality with inflation and FX. On a company our size. The impact of these changes take a bit more time than they take some time. But the actions that we're taking are we are moving quickly on these. And I think that's the idea here is we're moving quickly on a number of things, whether it be the changes all the investments and changes to our supply chain, to the divestitures that we're working on, to the integration of these acquisitions like Aferra and moving our cash business forward.

Operator

There's just a lot going on and I guess it's just important to understand that we're moving very quickly on these things and the results are starting and we're encouraged by that you're starting to see the results. When it comes to spine, look, this quarter was strong, last quarter was strong too. It was just offset by some of the last couple of quarters offset a little bit by the China VBP. But if you look underneath it, we've been quoting that implant growth rates that have been in the double digits. I mean that's very, very strong and something especially for some of our level of market share by far, the number one market share player to be growing like that.

Operator

What's driving that is the enabling technology ecosystem. It's something we've been working on aggressively since 2015. You've got the robot, you've got navigation, you've got interoperative imaging, You've got powered instruments, now you've got this AI based surgical planning system that basically it's You're winning over the hearts and minds of physicians as they see where we're going and actually a real commitment to changing spine surgery with this arsenal of technology and we've integrated it and it's not it's starting to help the workflow and move faster and more efficient. All of this coming together. That's what's driving it.

Operator

And at the same time, we've been able to invest in implants so that the implants are still at the latest and greatest. And I think Brett Wall and Skip Kill and the team have done a really good job. I don't know, Brett, if you want to make any further comments on that.

Speaker 9

Yes, Jeff and Joanna, thanks for the question. This has been something we've been working on for a while and the strategy is really coming together with This enabling technology that actually allows for better planning, better execution, better follow-up and assuming And assuring that you actually get the result that you want in the procedure. That technology along with best in class implants and biologics Is providing this ecosystem that's terrific for the physician and actually institutions that want to use it. And actually, the strategy is playing out like we've wanted to do with the significant growth In the largest market, which is the U. S, and as Jeff mentioned, now we're on the Q2 of double digit growth there in our core spine business in the U.

Speaker 9

S. And we like our strategy, technology and how this is playing out for us.

Speaker 1

Okay. Thanks, Joanne. Next question please, Brad.

Speaker 4

The next question comes from Matt Miksic at Barclays. Matt, please go ahead.

Speaker 10

Hi, thanks so much for taking the question. I had two follow ups if I could just quickly on diabetes and TAVR. So Jeff, your comments this morning, I don't know if it's just tone or My own impression, but it seemed like incrementally perhaps more confident and committed to diabetes and just I know where you're at with the morning letter, but maybe if you could talk about Whether you're we are incrementally more confident here than you were a few months ago and maybe talk about what the reentry to that market looks like assuming that you can get Assuming that you can get that the letter lifted and the product back to the market. And then just briefly on TAVR, As you know, one of your major competitors in that market has talked a lot about staffing and trends in the U. S.

Speaker 10

Just Anything that you would add in terms of sequential improvements or changes in that market or whether you're continuing to see some of the staffing challenges that Dave referred to, but don't seem to be holding back your growth quite so significantly in the U. S? Thanks.

Operator

Sure. Thanks for the questions, Matt. Yes, I'll start with the diabetes one. I'm not incrementally more committed because I've been committed since day 1. Mean, there's no have not blinked on diabetes.

Operator

So committed to the business. Yes, there is more confidence? Yes. And that's because we're continuing to see the impact of our technology when we have our full suite technology outside the U. S.

Operator

We're seeing strong growth, but it's not just the growth that's encouraging, it's patient feedback, the clinical results that we're getting, time and range and other important metrics from a clinical standpoint, but it's also the patient experience in terms of ease of use and things like that. And then on top of that, we've got this pipeline of technology that we've that's coming right behind it. New pipeline of sensors, we've submitted our simpler sensor for approval and we've got more behind that and a lot of development programs that I have a view into. And then finally, the business is just executing better. And so all that together is giving me more confidence.

Operator

I I'll ask you to make a comment. Qif, do you want to add to that?

Speaker 11

Yes. I mean, as Jeff said, we continue to expand access for 780 gs system and Guardian 4 sensor. It's in over 90 markets and wherever we see 780 gs launch. We also see higher CGM attachment rates because physicians and patients recognize the value of automation, automated insulin delivery in driving outcomes. And we expect to see a similar trajectory when 7 80 gs is available in the U.

Speaker 11

S. Market. And just to put a final point on what Jeff said about our next generation products, We submitted our next generation sensor CGM for CE Mark last year and we have also done that on a stand alone basis to the FDA. And we continue to make we continue to be very optimistic about The progress we're seeing in the market, the U. S.

Speaker 11

Market needs new products, we would know that, but I think we're making forward movement on all aspects of the business.

Operator

Thanks, Kew. And on the TAVR question, look, this is an area that we've been really focused on. Obviously, it's market where the therapy has a huge impact on patient outcomes and then financially for us it's an important driver. And we've been really focused on this team and this new model, really focused on this team and they've done a great job on a number of fronts in terms of training physicians and adding new reps, training new reps and adding in the field training physicians on the tech on the new techniques. But more recently here launching our Revolut FX and the results we're getting there of Sean.

Operator

But I think the team has done a great job and we're starting to make up some ground here with the competition globally, but in particular in the U. S. And Sean, maybe you can add some comments to this.

Speaker 12

Yes. Thanks, Chuck. We are seeing sort of mid single digit growth underlying for the U. S. Market and obviously we're moving faster than that 12% growth because of the launch of FX.

Speaker 12

And I think also this recognition that our valve hemodynamics is really playing out for better durability of that valve over time, which is becoming more and more important. FX really levels the playing field on ease of use, which has been important, But also you can line the commissures up, which is great for coronary access and as people are thinking about the lifetime of the valve, both durability and making sure those Corners are easy to get back into matters a lot and that combination has played out well for us. Yes, we do still see spotty procedure volume challenges. It's all around the world, most acutely this last quarter in Japan, as we said. There's a wave of COVID that impacted us and also we're dependent on a particular faster access that was impacted by supply chain issues last quarter.

Speaker 12

That's been resolved. So the launch of FX in Japan, returning procedure volumes and No constraint from vast or sheath will help us to grow there. And of course, as Evolut, FX rolls out around the world, We'll still perform well. The fundamentals of that market are still very, very strong. It's just all the multiple touch points to healthcare system that are required to get a patient in for therapy and through that therapy.

Speaker 12

But we expect that's going to start to bathe and get better with time.

Operator

Yes, very helpful. I mean, whether it be our structural heart business, TAVR or diabetes and Joanne asked about spine And she had mentioned in the account, what do you mean by urgent? What I like about the new the operating model we have is these businesses, We've got we've segmented them in the right way, where we have clarity, a transparency in their end markets. We're measuring them on, Are you growing above? We have clarity on market growth.

Operator

We're measuring them on are you growing above or below the market and comp is tied to that. So it creates this sense of urgency that we think is having an impact. It was kind of overwhelmed for a while by supply chain challenges. But as those mitigate, you're starting to see the impact of some of the changes we made.

Speaker 10

Thanks again.

Speaker 1

Thanks, Matt. Next question please, Brett.

Speaker 4

The next question comes from Josh Jennings at Cowen and Company. Josh, please go ahead.

Speaker 13

Good morning. Thanks for taking the questions. I was hoping to just ask about The JV, Renal Care JV and the patient monitoring and respiratory spin, just how we should be thinking about the impact to, I guess, Sanomatronic earnings in 2024 either from execution of those two moves or Just any headwinds in terms of the earnings power in 2024 due to just the initial staging of getting to the finish line on both of those tumors.

Speaker 2

Yes. In terms of the impact on total Medtronic earnings power, the separations are going to have minimal impact. So and in terms of staging the moves so that we have minimal impact or disruption across the company, we have been Very focused on that and have strong teams in place that are managing these separations really well. And we purposely put those teams in place as part of our new operating model. As we make these portfolio moves, we're focused on being best in class in how we

Speaker 13

do it. Thanks for that. Just a follow-up on the patient monitoring and respiratory spin. Is it possible that an unsolicited suitor could come into play? And How should investors think about the kind of potential for a parallel path to open up where you're moving forward to spin, but there could be potential suitors Coming in to pigmented eyes on those two businesses.

Speaker 13

Thanks for taking the question.

Speaker 2

Yes. Thanks, Josh. We're focused on maximizing shareholder value with the separation. And we've announced the spin, we're moving forward with that. Should something come along that maximizes shareholder value, we'll certainly listen to it.

Speaker 1

Thanks, Josh. Next question please, Brad.

Speaker 4

The next question comes from Cecilia Furlong at Morgan Stanley. Cecilia, please go ahead.

Speaker 14

Great. Good morning and thank you for taking the questions. Just 2 part question for me. First on HUGO and the euro ID in the U. S, if you could provide an update, just what you've seen early days in enrollment?

Speaker 14

And then separately, we've heard a lot about Italy impact. Just curious if you could frame how you're thinking about the potential impact to your business going forward? And thank you.

Speaker 1

Thanks, Cecilia.

Operator

Good to hear from you. On the first one, I'll let Bob White answer the question on the HUGO urology IDE enrollment and just overall progress what we're seeing in the U. S. And then turn it over to Karen for the question on Italy. So Bob?

Speaker 15

Great. Thanks, Jeff. And Cecilia, thanks for the question. As you've noted, the trial enrollment is underway for XpandEurope. First patients have been enrolled and proceeding nicely on that.

Speaker 15

So we're pleased with our progress on that IDE specifically. And then just more broadly to Jeff's point, last quarter we saw accelerated installations of HUGO, entered new markets across EMEA, APAC and LATAM. And again, if you think about where we're at around the world with the geographic expansion and our CE Mark allowing us to expand in the new markets. And then in CE markets, we've also added our general surgery indication on top of urology and gynecology. So So now we cover about 80% of robotic procedures in those markets.

Speaker 15

And what we've been pleased and you asked a little bit about feedback, we're getting really good feedback. The It's been used now to successfully perform a range of urology, gynecological, general surgery procedures from kind of simple to complex. And we're seeing that HUGO is the flexible and versatile tool we designed it to be. So it's early innings In terms of again, this market has got tremendous growth opportunity, only 5% of procedures are done globally that could be done We remain very excited about the market and we're pleased with where we are today.

Speaker 2

And Cecilia, on the Italy question, there is a law in Italy that requires Companies that sell medical devices to make payments to the Italian government if those device expenditures exceed maximum ceilings. The law was put in place in 2015 and applies to expenditures from that year onward. You've heard from some of our other competitors on this. The law is obviously applicable to the whole industry and we filed an appeal along with many other companies in our industry on this. In the Q3, For the first time, actual claims were issued to Medtronic and our peers for the years 2015 to 2018.

Speaker 2

And so we did revise our existing accrual. We already had an accrual and we did add to it in the Q3. That accrual is a reduction of revenue. For us, it wasn't too significant, but we do have a reserve on our books.

Speaker 1

Thanks, Vasilya. Let's take the next question please, Brad.

Speaker 4

The next question comes from Shai Gen Singh, RBC. Shai Gen, please go ahead.

Speaker 16

Great. Thank you for taking the question. Karen, one for you. Could you just elaborate on the components of the impact of components of the EPS impact on growth next year. You called out inflation, FX, interest and taxes.

Speaker 16

Perhaps you can talk about how large the impact is this year and what the flow through could be next year? And then I have a follow-up.

Speaker 2

Yes. Thanks, Shagun. So obviously, we've said we've got tons of moving pieces on next fiscal year. So we're not ready to give real guidance. And so to quantify the impact from EPS growth is difficult.

Speaker 2

But what I would say on currency, we talked about the fact that that is a headwind. I mentioned that in the commentary. And just at recent rates, currency is about a 5% headwind to next fiscal year. So we did quantify that. We also said that inflation impacts are about a mid single digit impact for us next fiscal year.

Speaker 2

So those are 2 that we've quantified. In terms of interest and tax, those are more minor headwinds than inflation and currency, but still headwinds that we need to face. And then obviously, we've got investments that we intend to make to drive the long term growth of this company. And where we see important investments, we're going to make them. And we've said that we think that we're going to drive R and D growth at least in line with revenue.

Speaker 2

And when we have important investments to make in some years that may grow even more than revenue. So hopefully that helps. That's

Speaker 16

helpful. Thank you. And I was just wondering if you could talk a little bit about the pulse AF data readout at ACC. How meaningful do you think it could be? And just maybe broadly talk about the PFA opportunity and how your platform is differentiated?

Speaker 16

Thank you so much.

Operator

Sure. Yes, thanks for the question. We're definitely excited about the data that's coming out of and the PFA opportunity. I think Sean's best positioned to answer your question. Sean?

Speaker 12

Yes. Thanks, Shri Gan. So we have a trial coming out on the 6, which will be the very first IDE trial done on the rigors of an FDA trial We're a study in this field, so it's really the first data set and it is 2 patient populations in the single trials, both paroxysmal patients as well as persistent patients. And the endpoints are our primary safety endpoint, primary efficacy endpoint. And the rigorous trial design here under the auspices of IDE trial mean that you have very frequent monitoring of the patients and You get a true just kind of look at the way this anatomical solution performs.

Speaker 12

I say anatomical solution because we have really 2 things in this bag of AF treatments. One is one where you isolate the pulmonary veins and then the Afera system allows you to also do point by point ablation with a highly differentiated catheter. That system is an automatic mapping system that allows you to kind of map a blade and then validate what Done and we'll put all of our catheters onto that ecosystem over time, including this anatomical catheter, the DiamondTemp as well as cryo catheters. So We'll have a full array of all energies, cryo, radiofrequency as well as pulsedial ablation to treat a myriad of arrhythmias that occur across the entire space. So it really does put us on with the newest technology early In this phase of that, highly differentiated on both the mapping system as well as the therapeutic catheter side.

Speaker 12

And there's a lot of excitement among physicians for what we're bringing to the field.

Speaker 1

Thanks, Shaggy. Brad, we've got time for 2 more questions, please.

Speaker 4

All right. The next question comes from Travis Steed at BofA. Travis, please go ahead.

Speaker 17

Hi, thanks for taking the question. Karen, I do want to ask on the Q4 margin step up. Q3 was a little bit light on margins from FX and currency. Just curious if there's anything other than the improving revenue to drive the Q4 margin step up. And then I know you're not going to get much on FY 'twenty four, but curious if you could kind of frame The opportunity in the cost side, I don't know if there's enough to offset the mid single digit inflation or partly offset that or more than offset, just a little bit of color on the cost savings side would be helpful.

Speaker 17

Thank you.

Speaker 2

Yes. Thanks, Travis. So on Q4 margins, That will be revenue growth obviously helps, so we'll start there. But we also will be driving cost reduction starting last quarter and even more into the Q4 that will help as well. And then Q4 typically is our highest margin quarter.

Speaker 2

So we're focused on that step up and it's typical for us. On the Cost opportunity for FY 2024, again, we're not going to size it right now, but we've said that we are focused on driving a significant a cost reduction to help partially offset the impacts that we've got from the various headwinds and the investments that we need to make.

Speaker 1

Great. Thank you. Thanks, Travis. And we'll take our final question please, Brad.

Speaker 4

Our final question comes from Rick Wise at Stifel Nicolaus. Rick, please go ahead.

Speaker 18

Good morning. Thanks, Ryan. Maybe I'll just in interest of time here, Just focus on back on one topic, Hugo. Jeff, it seems like you're Seeing a good ramp in Europe, but maybe you could quickly update us on supply chain, is that resolved, resolving, almost resolved? What's your thought about that process and your ability to meet the demand?

Speaker 18

Last quarter, you talked about backlog. Maybe you could give us some more color there. And specifically, just a little more detailed color about once HUGA is in place, the kind of adoption and maybe pull through of instrumentation you're seeing, just so we have a real a better sense of exactly where you are with HUGO.

Speaker 1

Thank you so much. Yes.

Operator

Great to hear from you, Rick. Thanks for the question. I'll turn it over to Bob for some of the details there. But I'd say just on HUGO, What the evolution of the is the feedback that we're getting, right? I mean, we felt confident in the design And as we got closer to launch, I was spending more time with physicians that were involved with the design.

Operator

They don't work for Medtronic, but They were involved and they were very bullish on it and happy with the way the product turned out. Now we're getting feedback from physicians that are converting from the competition or have both and they're high volume users and they have a high bar for robotic surgery and that feedback has been really, really strong and that is I think is very encouraging and that word is spreading. As I talked to U. S. Physicians that don't have access to it yet because they're not part of the trial and they have a pretty detailed understanding of the robot and its features and its capabilities.

Operator

And so we're getting and so that's driving really strong adoption. I'll let Bob talk about any kind of constraints or supply chain and any other details on adoption though.

Speaker 15

Yes. Thanks, Jeff and Rick, thanks for the question. A couple of other points, I think, Rick, that would be helpful for you is, We're now starting to fulfill repeat orders by customers, which is nice. So customers have not just bought 1, they're coming back to buy additional ones. And the other thing is we're seeing a mix really of both early robotic adapters and experienced accounts, which is nice because we built Hugo with a differentiated but built with physicians needs in mind.

Speaker 15

So we're excited what we see there. And with respect to the supply chain, As it relates to HUGO, a good pickup that is behind us. So we had I talked in previous quarters about hardening our supply chain and working through those manufacturing processes. That's all in the rearview mirror for us. And then as Jeff and Karen had mentioned more broadly For our surgical business, we've seen our supply chains improve dramatically through the year and you see that in the sequential quarter on quarter growth in that business.

Speaker 15

So hopefully that's helpful. Thanks.

Speaker 2

Encouraging to hear.

Speaker 1

Thank you.

Operator

And I think the, Eureka, I think on the pull through, For that pull through to have an impact, it's going to take a little bit of time. It's a big surgical innovations business we have, dollars 6,000,000,000 or so. But I will point to the spine business and Joanne asked the question earlier, 2 quarters in a row of double digit implant growth in the U. S, which is 80% of the market. That is largely driven by pull through of an ecosystem of technology that's hard to match.

Operator

That takes a lot of expertise, a lot of balance sheet and a lot of time. And we've spent a lot of time on this robot and we've invested a lot into it and it's not just the robot, it is visualization. It is the digital platform and we're confident that that ecosystem will be a differentiator for Medtronic and pull through instrumentation and be a durable growth driver for the company. And That's why we stuck with it for the last too many years to admit to, to get it to this point. And we feel like we have something to build from.

Speaker 1

Appreciate that, Jeff. Thank you. Yes. Thank you, Rick. Jeff, please go ahead with your closing remarks.

Operator

All right. Well, thanks for the questions. It's some great questions this morning. I really appreciate your support and continued in the company and we hope you'll join us for our Q4 earnings broadcast, which we anticipate holding on Thursday, May 25, where we'll update you on the progress and how we finished our fiscal year and of course I look ahead at fiscal 2024. So with that, thanks again for spending time with us today.

Operator

Please stay healthy and safe and have a great rest of your day.

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Earnings Conference Call
Medtronic Q3 2023
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