Medtronic Q4 2024 Earnings Call Transcript

Presentation

[Ryan Weispfenning, Vice President and Head of Investor Relations at Medtronic]

Good morning. I'm Ryan Weispfenning, Vice President and Head of Medtronic Investor Relations, and I appreciate that you're joining us this morning for our Fiscal '24 Fourth Quarter Video Earnings Webcast.

Before we go inside to hear our prepared remarks, I'll share a few details about today's webcast. Joining me are Geoff Martha, Medtronic Chairman and Chief Executive Officer; and Karen Parkhill, Medtronic Chief Financial Officer. Geoff and Karen will provide comments on the results of our fourth quarter and fiscal year 2024, which ended on April 26, 2024, and our outlook for fiscal year '25. After our prepared remarks, the Executive VPs covering our segments will join us and will take questions from the sell side analysts that cover the company. Today's program 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. The presentation can be accessed in our earnings press release or on our website at investorelations.medtronic.com.

[Technical Issues] acquisitions made in the last four quarters that had a significant impact on total company or individual segment quarterly revenue growth. References to sequential revenue changes compared to the third quarter of fiscal '24 and are made on an as-reported basis and all references to share gains or losses refer to revenue share in the first calendar quarter of 2024 compared to the first calendar quarter of 2023 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.

With that, let's head into the studio and hear about the quarter and the year.

[Geoff Martha, Chairman & Chief Executive Officer at Medtronic]

Hello everyone, and thank you for joining us today.

We delivered a strong finish to the fiscal year with broad strength across our businesses. Each of our four segments delivered mid single-digit or higher revenue growth, and this was on top of a strong mid single-digit performance last year. Throughout fiscal '24, we delivered consistent mid single-digit revenue growth with over 5% for the full year. At the same time, we're making progress on our commitment to restore our earnings power, which is evident in our fiscal '25 guidance. We're executing COGS cost-out programs while maintaining pricing and maximizing efficiencies in our operating overhead. And we're translating our earnings into strong and improving cash flow, which we're investing to drive future growth and return to our shareholders.

We also continue to enhance our operating model to make the company even more resilient, and our global workforce is embracing a performance-driven culture that is translating into durable results. We made solid progress in fiscal '24, and the momentum we're building into the new year has me very excited for '25. We're at the beginning stages of new product cycles. The runway from the differentiated technologies we've recently launched, along with the innovation we will launch over the next 12 months give me significant confidence in our ability to drive durable growth. These launches put us in a strong position in some of MedTech's most attractive markets like AFib, structural heart, robotics, neuromodulation, hypertension and diabetes. And this is further enhanced as we apply AI across our portfolio.

All that to say, we are very optimistic about what we can achieve here in fiscal '25 and beyond.

Now let's turn to the details of our Q4 results where we had a number of standout performances. We look at our businesses in three categories: established market leaders, synergistic and highest growth. Our established market leader and synergistic businesses both grew mid single digits, while our highest growth businesses delivered high single-digit growth.

Looking first at our established market leaders, combined, they made up just under half of our revenue and grew 5%. The highlight of the quarter was Cranial & Spinal Technologies. After growing 6% or higher every quarter this year, CST accelerated to 9% growth in Q4. I want to say that one more time, 9% growth in Q4. This was driven by an outstanding quarter for capital sales, with neurosurgery growing 14%. We had double-digit revenue growth in Mazor robotics, StealthStation navigation, O-arm imaging and Midas Rex powered surgical instruments. And this pulled through spine implants and biologics with high single-digit growth in biologics and mid single-digit growth in core spine, including 8% core spine growth in the U.S.

We also continue to see strong adoption of unit-adapted spine intelligence, our integrated AI surgical planning solution. Here we're taking data and building deep learning models that see patterns and create personalized outcomes for patients. As I've been sharing for several quarters now, our strategy of combining best-in-class implants and biologics with our best-in-class enabling technology and then adding our unique intelligence into the procedure is a winning formula in spine. We call it the AiBLE ecosystem and it's a big competitive differentiator for us. AiBLE is creating value for patients, it's winning over surgeons all around the world, and it's changing the competitive dynamics of the spine marketplace, and it's attracting the best reps to Medtronic to expand our business.

Next in Cardiac Rhythm Management, Cardiac Pacing Therapies delivered another strong quarter of high single-digit growth. Our Micra leadless pacemaker franchise grew over 20%, driven by the adoption of our latest generation Micra AV2 and VR2, which improve procedure efficiency and increase battery longevity by 40% to 16 or 17 years. Now, we hold the vast majority of share in the leadless pacing space. We also continue to expand our pacing leadership as the only company to offer an approved lead for an innovative alternative form of pacing called conduction system pacing. Our 3830 conduction system pacing lead grew over 40%. In Defibrillation Solutions, we're seeing good early adoption of our innovative Aurora EV-ICD, which requires no leads in the heart. Now, as more implanters complete their training, we expect EV-ICD sales to ramp and become a significant driver of CRM growth, taking share from the competitor's S-ICD system.

Next in Surgical, we grew 5%. Our advanced energy product lines grew high single digits on the continued launch of our LigaSure XP Maryland Vessel Sealer. We've now taken energy share from our main competitor for six quarters in a row. Our wound management business also grew high single digits as strong sales of our V-Loc Barbed Sutures also resulted in continued share gains from our main competitor.

In Q4, we expanded the capabilities of our Touch Surgery digital ecosystem. Just as our AiBLE ecosystem is transforming spine, Touch Surgery is transforming laparoscopic and robotic surgical procedures. We collect robust data sets from surgeries, including video, to create models that inject intelligence into these procedures. We've launched 14 new AI-based algorithms on our Touch Surgery Performance Insights platform just at SAGES last month. These first-in-class algorithms automatically analyze surgical procedures from anatomy to critical structures, enabling surgeons to objectively assess performance. We also launched Touch Surgery Livestream, which enables secure and seamless telepresence, including training and proctoring from a procedure room to really anywhere in the world. Overall, adoption of our Touch Surgery ecosystem is accelerating and it's becoming a very important differentiator for our surgical franchise.

Now turning to our synergistic businesses. Combined, they grew 5% in Q4. Cardiac surgery, ENT and endoscopy all grew high single digits. Pelvic health, coronary, peripheral vascular and neuromodulation all grew mid single digits. In neuromod, brain modulation had an outstanding quarter, growing low double digits. This was the first quarter of benefit from the launch of Percept RC with BrainSense technology, the only complete sensing-enabled DBS system on the market. Here we are seeing strong uptake and excitement for this exclusive technology and it's extending our number 1 leadership position in DBS in both Europe and in the U.S.

Our neuromod business also received really great news at the end of Q4 with the U.S. FDA approving the Inceptiv closed-loop spinal cord stimulator. The Inceptiv platform is a game changer in chronic pain therapy. The device automatically senses and adjusts stimulation 50 times a second, 24/7 with no required interaction from the patient, and the therapy is delivered from the smallest and thinnest closed-loop SCS device on the market, along with the best 3T and 1.5T full body conditional MRI access. Given all these advantages will now be carried in the bags of our very large SCS sales force, we expect Pain Stim to grow above market in the coming quarters.

Now, let's cover the highlights from the businesses in our highest growth markets. Combined, they made up 20% of revenue and grew high single digits and we expect that their contribution to overall growth will accelerate over the coming quarters as we launch new technology.

I'll start this quarter with Cardiac Ablation Solutions which delivered 21% sequential growth in the quarter, including 23% in the U.S. This is driven by our pulsed field ablation products, which are more than offsetting declines in our cryo product line. Q4 marked the first quarter of our PulseSelect PFA catheter launch. It's off to a great start with strong adoption from both focal RF and single shot users. As we expand the PulseSelect launch, we also continue to advance our robust pipeline of PFA technology.

Last week, U.S. pivotal data for our Sphere-9 focal catheter were presented at HRS and published in Nature Medicine. These data were impressive, especially when you consider we were studying persistent AF patients, the most challenging to treat. We showed Sphere-9 has an excellent safety profile, superior efficiency and numerically higher freedom from recurrent AFib compared head to head with the market-leading traditional RF ablation technology.

Sphere-9 can perform both PF and RF ablation as well as high density mapping, all from a single device, and we're looking forward to offering U.S. clinicians this first of its kind wide focal catheter. The output of all this is that we expect our CAS business to continue to accelerate its growth throughout the coming fiscal year as we increase our PFA account training and catheter production to meet the high demand. And over time, we expect our CAS business will reach market growth and then win share. And this will be driven by our PFA launches and the pull-through of our broader portfolio treating the growing population of patients with AFib.

Next in Structural Heart, TAVR continues to be a very important growth driver for Medtronic and we grew high single digits in the quarter. Structural Heart had two meaningful developments during Q4. First, data from our SMART trial was published in the New England Journal of Medicine and presented at ACC last month. SMART, it clearly showed our valve was better than Edwards SAPIEN in small annulus patients who are primarily women. This is a large segment of the TAVR space, about 40%, which is larger than most realize. Now, while it takes time to broadly change clinical practice and change customer contracting, we're seeing early signs from many loyal SAPIEN users that they expect to increase their usage of Medtronic valves, and we're building our business for that growth.

The second important development in Q4 was receiving U.S. FDA approval for Evolut FX+, our newest TAVR valve. FX+ has large windows in the frame to allow easy coronary access while providing the same exceptional valve performance of our Evolut platform. We have just started the limited launch now and are receiving really strong positive feedback from physicians. Full market release is expected in August.

So when you consider our four-year low-risk data, our SMART data and our new FX+ valve, we expect this combination to drive our TAVR growth at or above the market, especially as the FX+ launch ramps in our second fiscal quarter.

Turning to Robotic Surgical Technologies, we're establishing a strong foundation here and we continue to expand the Hugo system installed base. In the U.S., we are nearing completion of our urology pivotal trial. We also have now started enrollment in two new indication studies: hernia and gynecology. In addition, our development teams are making progress bringing our advanced surgical technologies to Hugo such as ICG, and our LigaSure vessel sealing technology.

In Diabetes, our team delivered another strong quarter, growing 11% globally. In the U.S., we grew 12% as the rollout of the MiniMed 780G system continues. New U.S. users doubled year-over-year again this quarter, and since launch, we've seen a significant increase in CGM attachment rates, resulting in high-teens growth in U.S. CGM revenue in Q4. Users are choosing our differentiated 780G system for the outcomes it delivers, all with less effort and less burden. 780G is the only AID system that provides both basal insulin adjustments and correction doses every five minutes. It offers flexible glucose targets as low as 100 and features our proprietary meal detection technology. This all leads to 780G users achieving a high time and range, as well as spending more time in automation with our SmartGuard technology.

In Europe, we began the limited launch of Simplera Sync with 780G and we're preparing for a commercial launch this summer. The early users and their healthcare providers are giving us fantastic feedback. Simplera Sync is half the size of our current sensor, is disposable, and it's a lot easier to put on. And in the U.S., I'm pleased to announce that we have now submitted Simplera Sync to the FDA.

Look, the turnaround in diabetes is palpable and now becoming a sustained growth story. We're committed to getting the business back to market leadership. This is why we're investing heavily in expanding indications for 780G system and developing next generation differentiated technology. This includes durable pumps, smart pens, patch pumps, CGM and software and algorithms. You've seen us execute a steady drumbeat of submissions, product approvals and expanded indications, and this is a cadence we expect to continue. We're the only company building out a complete ecosystem of leading technology for patients who require intensive insulin management. We believe this strategy positions us well and will drive our growth as the market continues to shift to automated insulin delivery and smart dosing.

Finally turning to Hypertension, we believe Symplicity will become an important growth driver for Medtronic. Since gaining approval last year, we've been training physicians and we're getting very favorable feedback from both clinicians and patients. We've also been working very closely with both CMS and private payers in the United States and expect to make significant progress on coverage and payment here in fiscal '25. With over 1 billion people worldwide living with hypertension and every 1% penetration into the target market is over $1 billion of revenue, our Symplicity procedure represents a massive opportunity.

Now with that, lets go to Karen for a deeper look at Q4 financial performance and our fiscal '25 guidance. Karen, over to you.

[Karen Parkhill, Executive Vice President & Chief Financial Officer, IT & Enterprise Excellence at Medtronic]

Thanks, Geoff.

So recapping our financials, the fourth quarter was yet another where we delivered on our commitments, growing 5.4% ahead of expectations. We continue to drive durable mid single-digit revenue growth as committed with more than 5% in fiscal '24. Importantly, we accelerated our comp-adjusted growth every quarter. And adjusted EPS in the fourth quarter was $1.46, at the upper end of our guidance range, and exceeding consensus.

The strength of our global business was apparent with broad-based growth around the world. As I noted last quarter, we expected our U.S. growth to improve as we launch new products and we delivered that with mid single-digit growth.

Our non-U.S. developed markets also grew mid single digits, including 7% growth in Western Europe and 5% growth in Japan. And Emerging Markets remained strong, growing 13% and now comprises 18% of our total revenue.

Looking down the P&L, our adjusted gross margin was roughly stable at 65.8% as our cost-out programs offset inflation, and our adjusted operating margin declined slightly more than expected, given higher sales incentives on the higher revenue, along with increased investments we've made in SG&A to support upcoming product launches. That said, we delivered operating profit in line with expectations.

We also continued to drive strong improvement in our free cash flow during the quarter as we focused across the organization on working capital. In fact, our free cash flow increased by 14% over last year to $5.2 billion, with a conversion rate well north of 100% in the back half of the year. Looking ahead to fiscal '25, we expect to continue to drive a year-over-year increase in both free cash flow and our conversion rate.

Turning to capital allocation. Our robust balance sheet allows us to operate from a position of strength. As you know, we prioritize both investing in our future growth and returning capital to our shareholders. We continue to evaluate tuck-in M&A opportunities against a high bar as we prioritize profitable growth. And to our shareholders, we remain committed to returning a minimum of 50% of our free cash flow. In fact, in FY '24, we returned $5.5 billion through both dividends and share repurchases, and over the past few months, we've repurchased over $2.5 [Phonetic] billion in the open market, reflecting the confidence we have as we finalized our plan in our ability to deliver ahead.

This confidence is also evident in the decision by our Board to increase our dividend for the 47th consecutive year, which we announced this morning. The yield from our growing dividend is an important component of the total return we generate for our shareholders. It's worth noting that we've been able to grow our dividend by 30% over the past five years and 130% over the past decade.

Now, turning to our guidance. After six quarters in a row, we firmly established a track record of delivering durable mid single-digit revenue growth. And as Geoff mentioned, we're at the beginning stages of many new product cycles that enable confidence in our top line. Given this backdrop, we have you start the year modeling our fiscal '25 organic revenue growth at 4% to 5%, including 4% to 4.5% in the first quarter. Our product launches will be ramping through the year, so we expect revenue growth to accelerate through the quarters as well.

By segment, we'd expect our three portfolios to be roughly aligned with the corporate average and Diabetes to grow above the corporate average. Our organic growth guidance continues to exclude revenue reported in Other as well as foreign exchange, and I direct you to the guidance slide in our earnings presentation for additional details.

Regarding currency, based on recent rates, we would see a full year unfavorable impact to revenue in the range of $275 million to $375 million, including an unfavorable impact of $85 million to $135 million in the first quarter.

Down the P&L, we expect expansion in our operating margin as we drive efficiencies in our overhead spend. At the same time, we continue to appropriately invest in R&D to drive future growth.

Taking all of this together, we're guiding our fiscal '25 non-GAAP diluted EPS in the range of $5.40 to $5.50, including $1.19 to $1.21 in the first quarter. This includes an unfavorable 5% impact from foreign currency for the full year, with an unfavorable 6% impact in the first quarter based on recent rates. Our fiscal '25 outlook reflects our commitment to restore our earnings power with EPS growth at the midpoint of about 5%. Importantly, at current rates, the impact from currency lessens through the year. So we expect to be ending the year with high single-digit EPS growth on a reported basis in line with our longer term objective.

Now, as we close this important fiscal year, I want to take a moment to express my gratitude to the employees of Medtronic around the world. The important results we delivered this year are all due to your hard work, dedication and commitment to Medtronic and our mission. Thank you for being the driving force behind our success.

Geoff, sending it back to you.

[Geoff Martha, Chairman & Chief Executive Officer at Medtronic]

All right, thank you, Karen.

Now, before we go to the analyst questions, I'll close with a few brief remarks. I hope you're feeling what we are, that the momentum at Medtronic is building; momentum that was set in motion by the comprehensive transformation we embarked on a few years ago. We streamlined our operating model, we put in place performance-driven culture, and we changed incentives. We brought in new leaders. We improved how we allocate capital, and we started the work of driving significant operational efficiencies to leverage our scale. This transformation is taking hold, and you're seeing it in our results.

And just in time for a very important Medtronic milestone, we're celebrating our company's 75th anniversary this year. It was back in 1949 that a medical electronics repair business was started in a garage in Minneapolis. Now, certainly a lot has changed over the past 75 years, but what hasn't stopped from the humble beginnings in that garage is our spirit of innovation and our dedication to delivering life transforming health technology that alleviates pain, restores health, and extends life.

As we celebrate our past, we are even more excited about our future. That legacy of invention and market creation continues today. And you see it. You see it with our PFA products in AFib, our sensing products in neuromodulation, our 780G and Simplera Sync system. You see it with our robotics, with our Evolut TAVR system, and our Symplicity hypertension procedure, and the dozens of new products across our businesses. Our pipeline of breakthrough innovation is impressive. And I'm incredibly excited about the impact that these products will have on patients, on physicians, and on our performance.

It's these new product cycles, combined with exposure to secular growth markets and an aging population that put us in a great spot to continue delivering durable revenue growth. And when you add this to our improving earnings power, our strong free cash flow and dividend growth, you have a great formula for creating shareholder value.

Finally, I'd like to join Karen in expressing my gratitude to our employees watching today. We've been through a lot of change. But through it all, your unwavering focus on our mission and performance has propelled our company forward. Your contributions matter not just for Medtronic, but for the millions of patients around the world that depend on us. And as we continue to innovate and grow, I'm confident that together, we will achieve even greater heights in fiscal '25.

So, with that, let's move to Q&A, where 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, Brad, can you please give the instructions for asking a question?

Questions and Answers

[Brad Welnick, Vice President, Investor Relations at Medtronic]

[Operator Instructions] Lastly, please be advised that this Q&A session is being recorded.

For today's session, Geoff, Karen and Ryan are joined by Que Dallara, EVP and President of Diabetes; Mike Marinaro, EVP and President of the Medical Surgical Portfolio; Sean Salmon, EVP and President of the Cardiovascular Portfolio; and Brett Wall, EVP and President of the Neuroscience Portfolio.

We'll pause for a few seconds to assemble the queue. We'll take the first question from Travis Steed at Bank of America. Travis, please go ahead.

[Travis Steed, Analyst at Bank of America]

Hey, good morning everybody. Thanks for the question. I wanted to ask about the EPS guidance ex-currency, 9% to 11%. I guess buyback maybe adds 1% to 2% there, but still above what Medtronic historically has done. So I wanted to understand the puts and takes better on your EPS guidance and how you're going to get there. And then kind of longer term, you're talking a lot about restoring earnings power. How should we think about the pathway on growing kind of EPS beyond FY '25? Thanks for the question.

[Geoff Martha, Chairman & Chief Executive Officer at Medtronic]

Well, Travis, thanks for the question. I'm going to hand this to Karen in a second, but let me just make a few opening comments on this. Look, the earnings power is something we've been working on for years. For example, we started our aggressive global operations and supply chain transformation over three years ago. We've been improving pricing. You see that in our FY '24 results. And we're strengthening this muscle and building on our momentum on pricing going into FY '25. We've made some tangible changes to mix, like exiting our ventilation business and divesting our dialysis business. These are a couple of examples, I'm sure Karen will go through in more detail. But the point is, I think they're structural -- programmatic structural changes to the enterprise that are allowing us to achieve top line growth, but at the same time growing that earnings power. Like I said, they're structural, they're programmatic, and they're giving us the confidence to FY '25 and beyond in terms of that earnings power improvement.

So, Karen, you can walk through some of the details on this.

[Karen Parkhill, Executive Vice President & Chief Financial Officer, IT & Enterprise Excellence at Medtronic]

Sure. Thanks, Geoff and Travis. So I would say in '25, we're focused on three key things: delivering continued mid single-digit top line growth while executing on our strong pipeline; investing in our high-priority growth drivers; and restoring the earnings power of the company, as Geoff talked about. And our guidance all starts with confidence and durability on our top line. We've got really high confidence, given the track record that we've had over the last six quarters and the fact that we've got this very robust pipeline coming to market. Much of it's already been approved by regulators and much of it is also moving from limited market release to full market release.

So we expect on gross margins, it to be flat year-over-year on a constant currency basis, because we've got cost down and pricing offsetting inflation. And on operating expenses, we continue to make appropriate investments in R&D to drive our future growth and we'll really drive leverage in SG&A. And that's through programmatic changes that we've implemented throughout the company, including discipline on headcount, focus on discretionary expenses. We've also got increased use of automation and digitization, and we've elevated the review and reporting on our expenses and our margins. And we've driven some structural changes too, like eliminating our respiratory interventions operating unit.

And on this expense, we've taken cost out already and you're seeing the full benefit of it this year. We actually drove this kind of leverage in '24. It was just masked by the impact of the true-up and incentive compensation that we did from '23 to '24. And then on top of operating leverage, you'll also see a large benefit from reduced share count, which will be a bit offset by incremental interest in tax. But when you put it all together, we expect this 4% to 5% top line growth, along with operating leverage and share count to deliver that high single-digit EPS growth for the year. And as our currency headwinds abate, we've said, we expect high single-digit actual or reported EPS in the back half of the year. And that goes to beyond this fiscal year. So beyond FY '25, we're focused on maintaining this mid single-digit revenue growth and continuing to drive leverage down the P&L to deliver that high single-digit EPS growth.

[Travis Steed, Analyst at Bank of America]

Great, thanks a lot.

[Geoff Martha, Chairman & Chief Executive Officer at Medtronic]

Hope that gets at you.

[Travis Steed, Analyst at Bank of America]

Yeah.

[Ryan Weispfenning, Vice President and Head of Investor Relations at Medtronic]

Thanks, Travis. Next question please, Brad.

[Brad Welnick, Vice President, Investor Relations at Medtronic]

The next question comes from Robbie Marcus at J.P. Morgan. Robbie, please go ahead.

[Robbie Marcus, Analyst at J.P. Morgan]

Oh, great. Good morning, everyone. Thanks for taking the questions. Maybe to start, I wanted to zero in, in the guide, you have accelerating revenue growth, it feels like, throughout the year with first quarter where it is, probably second half better than first half. I was hoping you could spend a minute on some of the products there because there's a lot of moving pieces and how we should think about the sources for upside and your confidence levels around that upside. And then I have one follow up.

[Geoff Martha, Chairman & Chief Executive Officer at Medtronic]

Sure, I'll take a stab at this, Robbie. And Karen can jump in and if I missed anything here. Well, first of all, look, we've got a lot, as been pointed out by many of you on the call here, a lot of approvals here recently in really high growth areas and we're in the early stages of these launches. But specifically to answer your question here, in FY '25, some of the -- one is in Structural Heart with Evolut FX, as it moves from this limited market release in the U.S. to a full market release, we're seeing strong uptick. And the SMART trial continues to build. The SMART trial results in small annulus continues to build on every body of clinical evidence. And we are seeing it change referral patterns. I mean it's pretty clear here what to do with these patients. And it's a bigger cohort of patients than I think most imagined at 40% of the market. So Structural Heart, TAVR is one, Evolut FX+, the changing referral patterns from SMART.

PFA is another one. We've got PulseSelect here. You saw the results with the over 20% sequential growth in the business and we really haven't seen anything from Affera, yet that's coming. So PFA is going to be a big one for us. And throughout the year, it's accelerating. And leadless, not only -- I mean, look, we -- first of all, we still maintain the lion's share of the market here. And we just launched -- recently launched it and we're continuing to take care. We just launched Micra AV2 and VR2. And the market's expanding. UnitedHealth Group, which you guys know is the largest commercial insurer in the U.S., just updated its policies to cover leadless pacemakers. And so you see us performing strong, new launches in an expanding market. So that's some of the cardiovascular related ones. And then again, our EV-ICD as well.

So there's a lot for FY -- in this fiscal year from cardiology. Neuroscience also has a lot. I mean, spine, you saw the acceleration. We expect that to continue with the combination of the implants plus the enabling technology plus the AI having a real impact. And this has been something we've been building on. And you're seeing good performance relative to the competition. I mean, I know there's a lot of bias out there on Globus, but when you look at apples to apples, we grew 9% and they grew 3%, on an apples to apples pro forma basis in the year, when you look at the combined invasive and Globus, that's 3% and we're 9%. That's a pretty big gap. And we've got 4 times the installed base, which is really a key to growth in that market now.

ENT continues to do well, and that's accelerating from the continued adoption of the PROPEL and SINUVA that came from the Intersect acquisition. And then, of course, in neuromod, with the closed-loop technology Percept RC, in my prepared remarks, you heard DBS growing double digits. And then right at the end of the quarter, we got the launch of -- the approval of Inceptiv, which is our ECAPS closed-loop stimulator for pain. We think it's a better product that's on the market. And with our large sales force, we're going to do some damage there.

And then the Diabetes, the 780G U.S. growth continues low double digits. I think we're going to continue to surprise people on diabetes and show continued strength. And then, of course, Hugo and RDN are both really good leading indicators of growth that you'll be seeing later in the year. So I mean that's -- there's a lot spread across the businesses and that's why we have the confidence in the mid single-digit revenue growth. And Karen talked about how that translates to the bottom line.

[Karen Parkhill, Executive Vice President & Chief Financial Officer, IT & Enterprise Excellence at Medtronic]

Yeah. And I would just add just briefly that our end markets are growing, our backorders are down, our supply chain has improved. The impact of VBP in China is largely behind us. And then obviously, we've got the long list of products that Geoff talked about.

[Geoff Martha, Chairman & Chief Executive Officer at Medtronic]

Yeah. And said another way, we're entering the year with a lot less questions, too, like risks, go back a year ago, China, a lot of uncertainty there. We had a high single-digit growth for the year, accelerating throughout the year, double digits in the last two quarters. So these are -- putting these things, some of these questions, risks or obstacles behind us is also, I think, another one that just the elimination of those plus the addition of the new products is -- you add it all up, it feels good going into the year.

[Robbie Marcus, Analyst at J.P. Morgan]

Great. Maybe a quick follow-up here. Karen, I appreciate the high-level building blocks down the P&L. I was hoping you could put a little more meat on the bone. You talked about gross margin expansion. How should we think about that? It sounds like R&D deleverage, SG&A, you have a lot of costs. I think that drove the miss in operating margin in fourth quarter. So how do we think about the level of investment versus savings in SG&A? It sounds like that does get us to a positive operating margin expansion. And then how do we think about the level of tax? I know it's going higher, but how much higher? Thanks.

[Karen Parkhill, Executive Vice President & Chief Financial Officer, IT & Enterprise Excellence at Medtronic]

Sure, Robbie. So just on the detail on gross margin, I said we expect it flat on a constant currency basis. We will have some currency headwind, about 0.5 [Phonetic] of downward pressure on gross margin at recent rates. But as I said, we've got good cost down and pricing offsetting inflation there and as those currency headwinds on the gross margin line should abate as we move through the year and be away, be gone as we exit the year.

As we look at R&D and SG&A, I would say in R&D, we're focused on continuing to invest. It's a critical priority to us. I've talked about it being the one line item that's allowed to grow in line or more than revenue in certain years. And we've been focused on driving efficiencies across the company, including in R&D, to enable these levels of investment. Some of the recent portfolio moves we've made, like setting up the JV for a renal care or shutting down our ventilator business, has allowed us to reallocate investment into our highest strategic priorities in R&D. So that remains an area of investment.

And then on SG&A, we are focused on driving continued significant leverage in SG&A, and I talked about the programmatic savings that we've been driving, that you're seeing more this fiscal year than you saw last year. We actually drove this kind of leverage in '24. I said it was just masked by the impact of the true-up in incentive compensation. So we're excited about what we're going to continue to drive in SG&A.

And then on tax, we expect tax to be a bit of a headwind, given global tax reform. We're pleased with the work that we've done to offset some of this, both on the tax line and above the tax line, but we expect it to be about 1 point higher than we had this past fiscal year.

[Robbie Marcus, Analyst at J.P. Morgan]

Thank you, Karen.

[Geoff Martha, Chairman & Chief Executive Officer at Medtronic]

So Robbie, when you think about FY '25 on the bottom line, as Karen mentioned, that's going to come from operating margin actions. And it goes beyond expense management. These are programmatic changes we've made in FY '24, and we'll see the full benefit of these. So these are changes that are made in the back and you'll see the full benefit of that in FY '25. On the gross margin line, which is super important, those programs are underway and as Karen mentioned, have been -- it's hard to see that because of some of the inflation and FX. But as we get into FY '26, as those abate, you'll see that gross margin start to expand as well. So we think we've laid this out the right way and got the programs lined up against it, have been working on it for some time and we'll see those benefits accrue over the next couple of years.

[Robbie Marcus, Analyst at J.P. Morgan]

Great. Thanks a lot.

[Ryan Weispfenning, Vice President and Head of Investor Relations at Medtronic]

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

[Brad Welnick, Vice President, Investor Relations at Medtronic]

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

[Vijay Kumar, Analyst at Evercore ISI]

Hey, guys, thanks for taking my question and congrats on a nice print here. Geoff, one on your restoring EPS power comments. What does that mean? What is the right base we should be thinking of? Are we thinking of operating margins perhaps getting back to upper-20s? Is there a timeframe for that and maybe some clarification on what that means?

[Geoff Martha, Chairman & Chief Executive Officer at Medtronic]

Well, look, I'll let -- I'm going to have Karen answer that. She kind of hit on that some in her prepared remarks, but have her kind of redo some of that. But the -- like I said just a second ago, on the operating margin, we've got a lot of confidence in that for the year, given the changes we've already made and the changes we've already made in the gross margin line and are continuing to expand, so those will start to hit in the later part of the year and move into the next year.

And I'll let Karen quantify...

[Karen Parkhill, Executive Vice President & Chief Financial Officer, IT & Enterprise Excellence at Medtronic]

Yeah, and just on restoring the earnings power, Vijay, it means that we are focused on driving that durable mid single-digit top line. It starts there, but then driving leverage down the P&L to deliver high single-digit EPS. And you'll see us exit the year of FY '25 doing that. And we're focused on maintaining it and driving it continued from there.

[Vijay Kumar, Analyst at Evercore ISI]

Understood. And just related to that, when you say operating margin leverage this year, is that on an ex-FX basis or what's the implied operating margins on a reported basis for fiscal '25?

[Karen Parkhill, Executive Vice President & Chief Financial Officer, IT & Enterprise Excellence at Medtronic]

Yeah, we're expecting margins around 26% in '25, and that's on a reported basis.

[Vijay Kumar, Analyst at Evercore ISI]

Thanks a lot, Karen.

[Karen Parkhill, Executive Vice President & Chief Financial Officer, IT & Enterprise Excellence at Medtronic]

So up from where we were in -- yeah.

[Ryan Weispfenning, Vice President and Head of Investor Relations at Medtronic]

Thank you, Vijay. Next question, Brad.

[Brad Welnick, Vice President, Investor Relations at Medtronic]

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

[Larry Biegelsen, Analyst at Wells Fargo & Company]

Good morning. Thanks for taking the questions. Congrats on a nice quarter here. Hey, Sean, it was great to see the mid single-digit growth in AF solutions in Q4 and congrats on the Affera data. How should we be thinking about the AF business before the Affera launch in the U.S.? Just remind us on the launch timing there and where you are with supply and your ability to get mapping equipment and personnel out there in the field. Thanks for taking the question.

[Sean Salmon, Executive Vice President & President, Cardiovascular Portfolio at Medtronic]

Thanks, Larry. First of all, the business is doing exceptionally well. That sequential growth that we've seen and the demand and interest coming out of both HRS and [Indecipherable] our new technologies is really astonishingly great. It's really, really high. And I say in the United States, Pulsed field is moving pretty fast there and we're catching that wave, obviously with our first entry here. And I'd say that there's -- as we scale up for further penetration of therapy, there's lots of other approvals we're getting around the world, there's expansion of capacity. And the most important thing to get Affera to the United States was that last module of clinical data that as you saw, that was really pristine, taking on head to head, the market leading technology, and just narrowly missing on superior efficacy. So that's all boding well.

To your point, though, the things we have to get right are scaling up manufacturing, and that's something we've been putting a lot of effort toward. We've moved into new Medtronic facilities away from the sort of acquired clean room that we purchased with Affera. And the last point and you'd asked about capital, and that's certainly not going to be a barrier to our success. We have all kinds of ways of helping with capital acquisition, including placing capital, leasing, [Indecipherable] costs, things like that, that we'll be availing ourselves to throughout the launch of that product as well.

So look, I think all things are going up. We're really excited about pulsed field ablation and the customers are really kind of beating the door down for it every single day. So it's exciting to be a part of.

[Larry Biegelsen, Analyst at Wells Fargo & Company]

Thanks for taking the question.

[Ryan Weispfenning, Vice President and Head of Investor Relations at Medtronic]

Thanks, Larry. Next question, please, Brad.

[Brad Welnick, Vice President, Investor Relations at Medtronic]

The next question comes from Pito Chickering at Deutsche Bank. Pito, please go ahead.

[Pito Chickering, Analyst at Deutsche Bank Aktiengesellschaft]

Hey, good morning, guys. Quick questions on margins this quarter. Like operating margins were a little bit softer than expected due to SG&A pressures. Just walk through what the variance was versus expectations that you talked about, higher sales comp and support for product launches. Just want to make sure I understand what happened versus what you're expecting.

[Karen Parkhill, Executive Vice President & Chief Financial Officer, IT & Enterprise Excellence at Medtronic]

Yeah. Thanks, Pito, for the question. You're right. So with the outperformance that we had on the top line, we did have some incremental incentive accruals in the quarter on sales incentive comp. And we've purposely driven investments in our strategic growth drivers as we worked to commercialize many of the exciting innovations that we've got heading into '25. We did all this and absorbed the incremental incentive comp and investments while still delivering on our financial commitments and beating the bottom line. But that's what it was driven by.

[Pito Chickering, Analyst at Deutsche Bank Aktiengesellschaft]

Okay. And then cranial is fine. We're pretty strong this quarter. Can you just talk about the durability of that growth? And so where we should be thinking about that growing in fiscal '25? Thanks so much.

[Brett Wall, Executive Vice President & President Neuroscience Portfolio at Medtronic]

You bet. Hey Pito, it's Brett Wall. Thanks for the question. We think it's very durable. If you look at where this business is going, as Geoff mentioned, we grew 3 times our nearest competitor in the space, and that's on a very large base of business. We are recruiting the best sales reps. We have this technology system with AiBLE that is allowing us to change how spine surgery is being done. We are recruiting physicians, sales reps, and our technology is making a difference in the marketplace. We see that as durable for several, several quarters here.

[Geoff Martha, Chairman & Chief Executive Officer at Medtronic]

Yeah, just one final point on that, Pito is, it's like the model is -- in the industry is changing to this capital equipment, this enabling technology. Now the enabling technology has to -- you have to have good stuff, it has to be integrated, has to have value. AI is a big piece of that and it's -- accounts are making investments in a company now, the Medtronic ecosystem AiBLE versus some other ecosystem, and there's not many out there. Right? So that's why we keep emphasizing our installed base and it's also changing the industry structure because this takes a lot of expertise and capital to build these ecosystems. So you don't have this long tail of tiny spine companies that are preying on docs. Those are going away. And so that's why we think this is durable and we're -- this -- yeah, we're investing heavily in this area and have been for years.

[Pito Chickering, Analyst at Deutsche Bank Aktiengesellschaft]

Great. Thanks so much.

[Ryan Weispfenning, Vice President and Head of Investor Relations at Medtronic]

Thank you, Pito. Next question, please, Brad.

[Brad Welnick, Vice President, Investor Relations at Medtronic]

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

[Joshua Jennings, Analyst at Cowen and Company]

Hi, good morning. Thanks for taking the question. I had trouble with the mute button there. I wanted to ask about emerging markets. Almost just under 20% of the revenue base grew double digits in fiscal '24. Maybe just help us understand some of the puts and takes there. And I think, Karen, you said most of the VBP headwinds are behind Medtronic now, heading into fiscal '25. China's almost 40% of the emerging market revenue base. So can you just talk about overall emerging market trends, expectations for sustainable double-digit growth, and specifics around China? Can we see acceleration in Medtronic performance and growth in China? Thanks for taking the question.

[Geoff Martha, Chairman & Chief Executive Officer at Medtronic]

Sure, Josh, thanks for the question. Look, as I think most of you know, I mean, emerging market focus has been something that we've been on for a long time and has been almost like an independent growth driver for us up until basically COVID, right, when certain markets like China shut down and then you had VBP. So the last couple of years have been choppy on emerging markets, I would say. But those fundamentals are coming back. Right? VBP is almost -- like China is a big one there. Right? VBP is mainly behind us, not totally. You've seen -- I'd say we're 80% of the way there. And you've seen the growth accelerating throughout the year, for us, the last two quarters, double digits for China.

When that last, call it -- we don't think there's a little bit of, I'll call them, hanging chads on VBP and the timing of those tenders and some of our smaller businesses like aortic or peripheral vascular, and there's a little bit left in neurovascular. When those hit, it could impact a quarter. So going from that double digits down to mid single, but we see, in any given quarter, mid single to high single to double. But China's, by and large, back and the procedures are strong, and that's a big part of our emerging market business.

And we're a combination there of import and local, that also gives us some strength. There are local product investments and those local products also can be exported to other parts of the world. So I think the other thing we've done here over the last couple of years is empowered our emerging market leaders a bit more than we had in the past. And they're able to allocate resources, I think, more effectively because healthcare is local and these markets have different emphasis on different clinical areas, and some have more cath labs than others. And that makes a difference, for example. And so with our emerging market leaders able to have more influence and control over the resources, that's helped accelerate our growth as well.

So I think the fundamentals are back, especially in China. Some changes we've made to our model and our incentives have helped as well. And our continued investment in value products, you add all that up and I see this as a continued strength and a continued source of growth for the company over a decade plus.

Karen, anything else?

[Karen Parkhill, Executive Vice President & Chief Financial Officer, IT & Enterprise Excellence at Medtronic]

I would just say on VBP, that can affect a quarter at an OU level, but we don't necessarily expect it to affect total Medtronic.

[Joshua Jennings, Analyst at Cowen and Company]

Okay. Just maybe one quick follow-up. Any product launches that we should be thinking about as we build out our -- update our models for fiscal '25, particularly in these emerging markets, but China specifically? Thanks.

[Geoff Martha, Chairman & Chief Executive Officer at Medtronic]

Well, in China specifically, we did just get approval for RDN, so that'll take some time to get into all the hospitals, but we think that's going to do well. We think our CST business there, again, separate from, I think, some of the trends you're seeing in the U.S., we've got a strong local portfolio there and a nice flywheel of local innovation. So a local version of Mazor that's coming out, a local version of our StealthStation navigation that's coming out. So I see strength there. And then we've also started local manufacturing of some of our cardiology products. I was just there a couple of weeks ago where I saw our local pacemaker coming off the line right next to that giant Tesla plant. We have a plant, not quite as big, but it's a damn good implantable technology plant and we're proud of that. So I think those would be some of the areas that I would highlight in China.

[Ryan Weispfenning, Vice President and Head of Investor Relations at Medtronic]

Thanks, Josh. Take the next question, please, Brad.

[Brad Welnick, Vice President, Investor Relations at Medtronic]

The next question comes from Rich Newitter at Truist Securities. Rich, please go ahead.

[Richard Newitter, Analyst at Truist Securities]

Hi. Thanks for taking the questions. Congrats on the quarter. Maybe first just on spine, you continue to put -- the turnaround in that franchise continues to unfold, high single-digit growth. And following up to an earlier question, I appreciate that you're growing faster than your closest competitor there, but you've talked about potential disruption from recent M&A and spine mergers as kind of being a once-in-a-decade opportunity. So can you comment on what, if any, contribution you've been seeing from the M&A environment to your benefit already and what's out in front? You mentioned rep hires, you mentioned competitive conversions. I'm just trying to get a sense for whether we're at the point where you're seeing those benefits or there's still more to come out in the front. We could maybe even see these growth rates accelerate.

[Brett Wall, Executive Vice President & President Neuroscience Portfolio at Medtronic]

Yeah, Rich, it's Brett Wall. Thanks for the question. We are seeing contribution now from some of those conversions that we're seeing really across the United States, as you know, which is the largest spine market. And we see that continuing over the next several quarters here. And as Geoff mentioned, it's a combination of this technology portfolio, including AI surgical planning, including robotics, including powered surgical instrumentation, imaging and navigation. Putting that all together is creating this very attractive place where very good teams and reps and groups of people want to come together to work with Medtronic.

So we have a very active program there. We're getting good contribution now, and we see that contribution continuing as we move forward. We have a very compelling story for those individuals to come along. And as was mentioned earlier, it's a lot more difficult now for companies that don't have that ecosystem to bring the customers and these individual teams of reps and others along in that process. So we see that continuing. We're going to continue to invest there. And as I mentioned, we have a compelling story for them to join Medtronic.

[Geoff Martha, Chairman & Chief Executive Officer at Medtronic]

Yeah, I think taking a step back also, Rich, on this, this whole ecosystem approach, capital plus consumables in CST, that's largely informing what we're doing in surgical as well and how you acquire the capital with innovative financing and earn-outs and things like that. This is helping us, and that's what gives us confidence also in our surgical business as we bring in robotics with Hugo there as well. And the second point I'll make is, look, you're starting to see the turnaround in both Diabetes and CST. And the point there is when we focus on these type of opportunities, we're going to get results here and you're seeing it there, and we're putting that same kind of focus on Hugo and our broader surgical business and our AFib business, CAS. These are two big opportunities that we're focused on. And there's a lot of -- I know there's a lot of questions that we get on those two areas and like CST and Diabetes, with the kind of focus we're putting on it at the leadership level of the company, I'm confident you're going to see those be growth drivers for the company as we move forward. And you're seeing it now in CAS.

[Richard Newitter, Analyst at Truist Securities]

Thank you and just on the...

[Ryan Weispfenning, Vice President and Head of Investor Relations at Medtronic]

Thanks, Richard.

[Richard Newitter, Analyst at Truist Securities]

On the robot in surgical, you're nearing the completion for the URO trial. Just curious if you could provide an estimation timing-wise, should we be expecting we could see a submission in '25 and potential launch end of fiscal '25, early fiscal '26? Any color there will be helpful. Thank you.

[Geoff Martha, Chairman & Chief Executive Officer at Medtronic]

I'll let Mike Marinaro answer that question. Mike?

[Mike Marinaro, Executive Vice President & President, Medical Surgical Portfolio and Surgical Operating Unit at Medtronic]

Yeah, so thanks for the question. I won't estimate when we will submit for the urology indication, but also note that we are nearing completion and in the quarter, we also initiated our indication work for both our GYN indication as well as a hernia indication, which will be really important for us as we move into general surgery. So critical that we are now operating across multiple indications so that as we come into the market, we can have a series of launches across each of those to capture larger and larger pieces of the market. And we're seeing good execution, early execution inside of each of those studies as well.

[Richard Newitter, Analyst at Truist Securities]

Thank you.

[Ryan Weispfenning, Vice President and Head of Investor Relations at Medtronic]

Yeah. Thanks, Rich. We are just past the top of the hour, so we'll take one more question please. Brad.

[Brad Welnick, Vice President, Investor Relations at Medtronic]

Our final question will come from Matt Miksic at Barclays. Matt, please go ahead.

[Matt Miksic, Analyst at Barclays]

Great. Thanks so much. Maybe just a couple of follow-ups on some of the pipeline programs that you talked about. Just to frame expectations around -- for RDN, Symplicity, when does that, do you think, start to noticeably show up and start to demonstrate some of the potential that you were describing earlier, Geoff? And then on Diabetes, you filed, I wasn't sure if I recall whether you filed Simplera with 780 for peds, for adults, for both. And I guess the question is, does that mean that before this coming fiscal is out that we'll start to see some traction with that new sensor in the U.S.? Thanks.

[Geoff Martha, Chairman & Chief Executive Officer at Medtronic]

Thanks for the questions, Matt. I'll have the subject matter experts answer those. I'll start with Sean on Symplicity.

[Sean Salmon, Executive Vice President & President, Cardiovascular Portfolio at Medtronic]

Yeah, thanks, Matt. I think you know the most important thing for us to establish is reimbursement. That's the catalyst which starts to make things tick upward for us. We'll look toward the final inpatient rule for outpatient reimbursement, that'll be in the kind of late July timeframe to know if that's going to be there. But the vast majority of our procedures are going to occur in the outpatient setting and we're pursuing both a transitional payment there as well as most importantly, national coverage determination with evidence development. And we're in active conversations with CMS on that and of course, private payers. So we expect contribution to begin this year.

As Geoff said at the outset, paying down timing, it's not like we have statutory dates on these things. It's just when these come through. But suffice it to say, there's a huge effort to get that reimbursement established in place. We're also changing guidelines in Europe. We expect that to happen late this summer, which will help with adoption there. And we've got new approvals, not just China but also Health Canada. Those would be catalysts, but it really is the most important thing is unlock on reimbursement, and that's a full court press for us.

[Geoff Martha, Chairman & Chief Executive Officer at Medtronic]

Okay, Que, you want to answer the diabetes one?

[Que Dallara, Executive Vice President & President Diabetes Operating Unit at Medtronic]

Yes. We filed the Simplera Sync, which is the integrated sensor with 780G system in the U.S., in line with expectations. It's hard to comment on the timing with the agency, but we're eagerly awaiting approval for that system. And just to remind everyone that we had limited launch of the Simplera Sync with 780 in Europe in five countries. That's going very well, and we're looking forward to expanding that to a full commercial launch in the summer. And then, of course, Simplera with InPen, we launched late last year. It's now in 15 countries, also doing quite well. So we anticipate that what we're seeing in the OUS markets will also happen in the U.S.

[Matt Miksic, Analyst at Barclays]

Excellent. Thank you.

[Ryan Weispfenning, Vice President and Head of Investor Relations at Medtronic]

Yeah, thanks, Matt. Geoff, please go ahead with your closing remarks.

[Geoff Martha, Chairman & Chief Executive Officer at Medtronic]

Okay, thanks, Ryan, and thanks for the questions, everybody. We definitely appreciate your continued interest in Medtronic, and we hope you'll join us for our Q1 earnings broadcast, which we anticipate holding on Tuesday, August 20th, where we'll update you on our progress against all these strategies and our commitments.

So with that, thanks for spending time with us today and have a great rest of your day.

Participants

Corporate Executives

• Ryan Weispfenning, Vice President and Head of Investor Relations
• Geoff Martha, Chairman & Chief Executive Officer
• Karen Parkhill, Executive Vice President & Chief Financial Officer, IT & Enterprise Excellence
• Brad Welnick, Vice President, Investor Relations
• Sean Salmon, Executive Vice President & President, Cardiovascular Portfolio
• Brett Wall, Executive Vice President & President Neuroscience Portfolio
• Mike Marinaro, Executive Vice President & President, Medical Surgical Portfolio and Surgical Operating Unit
• Que Dallara, Executive Vice President & President Diabetes Operating Unit

Analysts

• Travis Steed, Bank of America Co.
• Robbie Marcus, J.P. Morgan
• Vijay Kumar, Evercore ISI
• Larry Biegelsen, Wells Fargo & Company
• Pito Chickering, Deutsche Bank Aktiengesellschaft
• Joshua Jennings, Cowen and Company
• Richard Newitter, Truist Securities
• Matt Miksic, Barclays PLC