Medtronic Q2 2024 Earnings Call Transcript

Presentation

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

Good morning. Welcome to our crisp fall morning here in Minnesota. I'm Ryan Weispfenning, Vice President and Head of Medtronic Investor Relations, and I appreciate that you're joining us this morning for Medtronic's Fiscal '24 Second 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 second quarter, which ended on October 27, 2023, and our outlook for the remainder of the fiscal year. After our prepared remarks, the Executive VPs covering our segments will join us and will take questions from the sellside 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 investorrelations.medtronic.com.

During today's program, many of the statements we make may be considered forward-looking statements, and actual results may differ materially from those projected in any forward-looking statement. Additional information concerning factors that could cause actual results to differ is contained in our periodic reports and other filings that we make with the SEC, and we do not undertake to update any forward-looking statement. Unless we say otherwise, all comparisons are on a year-over-year basis, and revenue comparisons are made on an organic basis, which excludes the impact of foreign currency and second quarter revenue in the current and prior year reported as other, which stems from prior business separations. There were no 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 first 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 third calendar quarter of 2023 compared to the third calendar quarter of 2022 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.

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

Hello everyone and thank you for joining us today. Q2 was another good quarter for us as we executed and delivered mid-single digit revenue growth. The underlying fundamentals of our business are strong, and our growth was broad based across multiple businesses and geographies, with Cardiovascular, Neuroscience and Medical Surgical, all growing mid-single digits and diabetes accelerating to high single digit growth.

Our new product launches are performing well and driving growth across many businesses, and we look ahead to the back half of our fiscal year. Those launches, combined with several recent regulatory approvals give us confidence in our ability to continue delivering dependable growth. And at the same time, we're executing on our comprehensive transformation, including enhancing our global operations, quality and supply chain.

And we're decisively allocating capital into fast growth medtech markets and fueling innovative technologies in areas like robotics, AI and closed loop systems that will drive our growth over the next decade. We're forging the path to durable growth as we execute on the actions needed to create long-term value for our shareholders.

So now let's get into the details behind our Q2 results. We continue to look at our portfolio of businesses in three categories -- established market leader businesses, synergistic businesses, and highest growth businesses. Looking first at the established market leaders, we had a very strong performances across Cranial and Spinal technologies, Surgical and Cardiac Rhythm Management. Combined, they made up just under half of our revenue and grew 6% organic again this quarter.

Starting with Cranial and Spinal Technologies, continued adoption of our AiBLE ecosystem is driving consistent above market growth. In Q2, we grew 7%. Digitization is transforming the competitive landscape in Spine, and we're leading the way with AiBLE.

With our global footprint of over 10,000 systems -- over 10,000 systems, we're over four times greater than the nearest competitor. We are the first and only solution with integrated AI based surgical planning with unit adaptive spine intelligence. Our Mazor robotics system is the first and only to offer bone cutting, a feature that was well received when we unveiled it at the North American Spine Society Conference in Los Angeles just last month. And we remain the clear leader in the intraoperative imaging and navigation space with our O Arm and Stealth Station technologies, both of which grew double digits in the quarter.

As surgeons adopt AiBLE, and we continue to expand our sales teams and invest in future innovation, we expect to maintain our leadership and extend our share gains in spine.

Now moving to surgical, we grew 6% here. There was broad-base strength across our surgical franchise. Hernia and Electrosurgery both grew in the double digits on strong sales of our ProGrip and Dextile mesh and Valleylab smoke evacuation systems. Advanced stapling and wound management, both grew mid-single digits.

Cardiac rhythm grew 4%, with high single digit growth in cardiovascular diagnostics and cardiac pacing. In pacing, our Micra leadless pacemaker franchise grew 13%, driven by our U.S. launch of our next generation Micra AV2 and VR2 devices. We're also seeing strong growth in conduction system pacing, an alternative to traditional single or dual chamber pacing. Our 3830 lead, the only approved lead for this novel form of pacing, grew strong double digits again this quarter.

And late in the quarter, we received FDA approval for our Aurora EV-ICD system, a game changer for the single chamber ICD space. Now we're ramping up our training of implanting cardiologists on the Aurora technology. So, Aurora delivers the benefits of a traditional ICD, including similar size, longevity and pacing features, but without the leads in the heart or veins. And these benefits can be realized with one device, and only one implant procedure. And just to drive this point home on size, there's a big difference here versus the competitor's device. And I mean big. Here's an x-ray of an Aurora EV-ICD patient with the competitors right next to it, just for comparison. So, in addition to all the clinical benefits of our EV-ICD, you can see that it's meaningfully smaller, and of course, lighter than the competitors. And here's the model that we're giving our reps to explain the difference to customers. Now, this is the size of the competitor's device, and we can actually pop out the Aurora to show how much smaller it actually is. So, it's like those nesting dolls, except here we just pop out. We get started with a big guy and then we go right to the small guy. So let me pop this out. So, you see inside the model, here's Aurora, much smaller, much lighter. And speaking of weight, we actually had to put a series of weights inside of here to get the bigger device to exactly replicate the weight of our competitors.

So, we're really excited about this as we've got a meaningfully, better option for patients. Our advantages will not only displace the competitors' device, but will expand the population far beyond the existing segment. We think this can grow to become $1 billion plus segment.

Turning to our synergistic businesses, combined they grew mid-single digits in Q2, and we had several standout performances. Aortic grew 9% on strong momentum in our Endurant AAA franchise following the 10-year real world durability data presented at the Charring Cross Symposium earlier this year.

Our coronary business grew 6% as we gained share in international markets on the continued rollout of our Onyx Frontier drug eluting stent. Cardiac surgery grew 9%, driven by strength in perfusion and cannula, as well as the Nautilus ECMO oxygenator.

Our endoscopy business grew 13%, driven by continued adoption of GI Genius. GI Genius uses the power of artificial intelligence to detect polyps in real time during a colonoscopy, integrating seamlessly into a GI doc's existing workflow. GI Genius results in a 50% reduction in missed polyps versus a standard colonoscopy, which plays an important role in the prevention of colon cancer.

Turning to businesses in our highest growth markets, cardiac ablation solutions grew 6% on strong market procedural growth. Now, over the coming years, we expect this business to be a very meaningful growth driver for Medtronic. We are leading the way in bringing Pulse Field Ablation catheters to market in both the focal and single shot segments. In focal PFA, we continue to ramp manufacturing of the Sphere-9 catheter and remain in limited market release in Europe. Sphere-9 can perform both PFA and RF ablation, and drives high-density mapping, all from the same catheter, and it integrates seamlessly with our differentiated Affera mapping system.

In the US. We expect to complete the 12-month follow up in the pivotal trial for Sphere-9 in the coming weeks, and then we'll prepare for FDA submission.

In single shot PFA, we just received CE mark for our PulseSelect catheter, and it will be commercially available early next calendar year. We are now the only company with approved catheters for both single shot and focal PFA, and in the U.S., the FDA is reviewing our PulseSelect submission, and we expect to be one of the first companies with a PFA catheter in the U.S. market.

Now, with our PFA catheters and the Affera map Nav system, combined with our leading Arctic Front cryosolution and differentiated FlexCath Cross transseptal system, we expect to drive strong, long-term growth in the fast growing $8 billion EP ablation space.

Now, turning to structural heart. Overall, the TAVR space continues to grow in the high single, low double-digit range. In Q2, we grew mid-single digits, which was below the market. Now, we declined slightly in the US. comping difficult prior year comparisons when we initially launched Evolut FX and customers purchased for stock. Yet we grew 4% sequentially, evidence of the strength of our product.

In Europe, we grew high single digits and received CE mark for Evolut FX at the end of the quarter. And in Japan, we continued to win share and grew in the mid 30s on the continued adoption of Evolut FX and expanded ESRD indication. Our Evolut platform has now shown superior valve performance compared to surgery in randomized trials that extend to five to 10 years after initial procedure. And last month, our landmark Evolut low-risk trial was presented at TCT and published in [Indecipherable]. The trial randomized patients to Evolut or best in class surgery. As you can see in this chart, Evolut, which is the blue line, had a lower rate of death or disabling stroke, and the difference continues to diverge each year, going from a 2% difference at two years to 2.9% at three years, and growing to a 3.4% difference at four years. This resulted in a 26% reduction in death or disabling stroke with Evolut at four years, and no other transcatheter valve has shown better valve performance and outcomes compared to surgery.

Valve design matters, and this differentiates us competitively. Physicians understand this data. This is compelling to them and it's compelling to patients. So, as we look ahead, we expect the combination of this data coupled with the global rollout of Evolut FX to drive our TAVR growth above market.

In neurovascular, we grew high single digits when you exclude sales in China, where the coils market is subject to volume-based procurement. We continue to see very strong growth in flow diversion, which was up low 20s globally. This is being driven by our innovative Shield technology for treating brain aneurysms, which is available on both the Pipeline Flex and Pipeline Vantage flow diverters.

In robotic surgical technologies, we increased our installed base as we continue the international launch of our differentiated Hugo robotic system. In the U.S., our EXPAND Euro Pivotal trial continues to enroll and is on plan, and we're happy to announce that we have FDA approval to start our U.S. Hernia Indication Pivotal trial for Hugo.

Adoption of Hugo is positive with surgeons appreciating features that are core to the system, including Touch Surgery Enterprise Digital Technology. This AI powered video solution, currently available for both robotic and laparoscopic surgery, creates a new paradigm for case review and performance improvement. We've already deployed it in over 20 countries, and we're continually developing our connected digital ecosystem, and we're excited about the upcoming launch of Touch Surgery Livestream to enable live streaming and sharing of procedures securely and seamlessly. We expect Hugo equipped with advanced digital capabilities to be a meaningful growth driver for us in the years ahead.

We believe surgeon preference with our open console and modular design, our leading position in minimally invasive surgery and instrumentation, our connected digital ecosystem and data-enabled insights, along with our world-class surgical training program and partnerships, will meaningfully advance the low penetration of robotic surgery around the world.

And in diabetes, our customer base is expanding sequentially as users around the world purchase the MiniMed 780G system. 780G is the only AID system to make correction boluses every five minutes, offer flexible glucose targets as low as 100, and feature meal detection technology. This combination is resulting in high time and range. Users are achieving or exceeding their glycemic targets, and importantly, realizing the relief that comes from burden reduction in their diabetes management.

In Q2, our diabetes business grew 7%, its highest growth in 10 quarters or five years when you exclude the COVID comp in Q4 of FY '21. In international markets, we continue to see robust mid-teens growth, driven by the recurring revenue from CGM and consumable sales to customers that have adopted our AID technology. And in the U.S. this was our first full quarter of the 780G launch, and we're meeting or exceeding our launch goals. Our U.S. pump sales increased over 30% sequentially. The number of unique 780G prescribers has increased over 20% since last quarter, with many returning to Medtronic as they learn about the differentiated outcomes users are getting with 780G.

And we also continue to see very high CGM attachment rates in our 780G installed base, meaningfully above the rates prior to launch. All of these leading indicators give us confidence that we'll see a significant ramp in our CGM and consumable sales in the U.S., and return to year over year growth in the back half of this fiscal year.

We've been driving this turnaround, and as we look ahead, we expect diabetes to drive even more meaningful growth for us. We expect the majority of the intensive insulin management space to move to smart dosing through either AID systems or Smart MDI. And we're well positioned to take advantage of this trend, as we're the only company investing in a complete ecosystem of differentiated technology for people living with diabetes, including next generation durable pumps, smart pens, patch pumps, sensors and algorithms.

So, with that, let's go to Karen for a deeper look at our Q2 financial performance and our fiscal '24 guidance raise. Karen?

[Karen Parkhill, Chief Financial Officer at Medtronic]

Thanks, Geoff. Looking at our financials, overall, it was another good quarter. Our revenue grew 5% ahead of expectations. An adjusted EPS was $1.25, $0.07 above the midpoint of our guidance range, with about $0.03 from stronger than expected revenue, $0.03 from better gross margin, and approximately $0.01 coming below the operating profit line.

As Geoff mentioned, we remain focused on delivering durable growth. Based on the changes we've made, including our operating model, incentives and capital allocation, we've positioned the company to deliver sustainable mid-single digit growth on the topline, and you are seeing that play out for four quarters in a row now.

Looking at our second quarter revenue growth, you can see the diversification coming through, which is important to driving long-term durability. As Geoff stated, our three portfolios grew mid-single digits, and diabetes accelerated to high single-digit growth. The broad-based growth also came through on a geographic basis.

Western Europe grew high single digits, with strength across many cardiovascular businesses. Diabetes, neurovascular and pelvic health. And Japan grew mid-single digits and was also driven by strong results in many cardiovascular businesses as well as surgical and neurovascular.

Emerging markets grew 9% or 13% when excluding Russia, given the sanctions. We had low 20s growth in the Middle East and Africa, high-teens growth in South Asia, mid-teens growth in Southeast Asia, and low double-digit growth in Latin America. China grew high single digits as some of the VBP that we expected was delayed until later in the fiscal year.

While our adjusted gross and operating margins declined in the quarter, both were ahead of expectations. With gross margin about a third of the year-over-year change was due to currency, and the remainder was driven by inflation, and our adjusted op margin decline was entirely driven by currency. On a constant currency basis, it increased 40 basis points.

We're executing to implement efficiencies in our expense structure, and you can see this in the 90-basis point improvement in SG&A. Below the operating margin line, we benefited from higher global interest rates on our investments, and this was partially offset by a higher-than-expected tax rate, mainly due to jurisdictional mix of profits as well as a lower benefit from stock-based compensation.

Turning to capital allocation, we continue to prioritize investments in innovation to fuel and sustain our long-term growth. We're disproportionately investing in some of the fastest growth markets in medtech, and we have a longstanding track record of returning capital to our shareholders, primarily through our strong and growing dividend. And to the extent that we don't find high-growth, high-return, tuck in M&A, we would expect to return additional capital to our shareholders by retiring shares.

Now, turning to our guidance, given our second quarter outperformance and continued strength in our underlying fundamentals, we're raising our full-year guidance today on both the top and the bottom line. We expect fiscal '24 organic revenue growth of 4.75%, an increase from the prior 4.5%. For the third quarter, we're expecting organic revenue growth to be in the range of 4% to 4.5%. And while the impact of currency is fluid, based on recent rates, foreign currency would have an unfavorable impact on full-year revenue of $100 million to $200 million, including an unfavorable impact of zero to $50 million in the third quarter.

On a comp adjusted basis, our third quarter guidance represents acceleration from the second quarter, and we expect this trend to continue into the fourth quarter as we're ramping a number of recent product launches in the back half of the year. In diabetes, we're projecting the U.S. to return to growth in the second half of the year on the continued adoption of 780G, and the associated CGM and consumable sales.

In medical-surgical, we have the continued rollout of the Hugo Surgical Robot and GI Genius. In neuroscience, there's our AiBLE ecosystem and spine, our inceptive closed loop pain stem device in Europe, and we're awaiting FDA approval for both Inceptiv and our Percept RC DBS device.

In cardiovascular, we're ramping our TAVR and PFA launches in Europe, starting the rollout of EV-ICD in the U.S. and Europe, and we are now starting our Ardian sales in the U.S. This all gives us confidence in the continued durability of our topline growth.

Moving down the P&L. Our margins this year continue to reflect the impact of currency and inflation, and some of the volume-based procurement tenders in China that were expected in the first half have shifted to later in the year. That said, we're focused on continuing to drive efficiencies in our expense base, and we've got our global operations and supply chain centralized to take advantage of our scale. As you know, stabilizing our margins and then improving from there remains a top priority.

On the bottom line, we're raising our fiscal '24 non-GAAP diluted EPS guidance to a new range of 513 to 519, an increase from the prior range of 508 to 516. While we expect FX and tax to be a few pennies more unfavorable in the second half, we are pleased with the momentum we have demonstrated, and our pipeline from here.

For the third quarter, we expect EPS of a $1.25 to a $1.27. And on foreign currency, based on recent rates, we're seeing an unfavorable impact of 6% on full year EPS, including an unfavorable 5% impact in the third quarter.

Before sending it back to Geoff, in the spirit of Thanksgiving, I want to extend my gratitude to our 95,000 employees around the world who come to work every day to deliver on our mission. You all play important roles in alleviating pain, restoring health and extending life for two patients every second, which makes this world a far better place. Back to you, Geoff.

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

Okay. Thank you, Karen. Now, I know GLP-1s have been on your mind, as the promise of these drugs has certainly had an outsized impact on Medtech stocks, including ours, over the past four months. So, I thought it would be helpful to share with you our view on their potential impact on our markets.

Now, GLP-1s are clearly an exciting class of drugs for patients, and the select data presented at AHA suggests the potential for a large market. That said, the key takeaway from our analysis is that outside of a modest impact on the bariatric surgery market, which we believe will be temporary, we don't see these drugs impacting Medtronic's growth outlook, even long term. This expectation is based on our extensive science-based work. Like many of you, we've modeled potential uptake and impact based on epidemiology, based on what we've seen historically with other drugs, and based on the relative risk reductions and adherence rates seen in select. So given the select results showed smaller impacts on the more obese patients, we believe that bariatric surgery will remain the gold standard for addressing obesity. We also know that many of the patients that try these drugs do not stay on them for more than a year, likely due to durability, side effects or affordability, which creates opportunities for new patients to consider surgery. For these reasons, we believe the current headwinds on U.S. bariatric procedures will stabilize over the next several quarters and return to growth by calendar year 2025. And this is modest and manageable within our broader diversified surgical business.

Now with diabetes, our customers are primarily type I. With only 10% of our installed base in type II insulin dependent patients, we do expect growth in our type II business going forward, but type II pump penetration rates are so low that even using aggressive GLP-1 modeling assumptions, we don't see any meaningful change in our diabetes growth outlook through 2030.

Now, we'd be happy to discuss this in more detail in Q&A, including our view on the select trial and its potential implications for Medtech.

Now, before we go to the analyst questions, I'd like to close with a few brief concluding thoughts on our progress. You're seeing in our results that many of the challenges that have held back our growth have largely been mitigated, whether that's diabetes, China or the issues in our supply chain. And we've established a track record of delivering durable, mid-single digit revenue growth, which we expect to continue in the back half of the fiscal year. We have some really compelling product approvals that drive our growth, not only in the back half, but for years to come. There's been a number of things that have happened recently, big things in the last four weeks in particular with our TAVR data, that gives us just such an advantage in the marketplace, new product approvals like EV-ICD, geographic and indication expansions, and last Friday we got already an approval.

This opens up a multibillion-dollar market opportunity for us. And with over one billion people worldwide with hypertension, the opportunity is massive. In fact, just 1% penetration of the target market represents over $1 billion of revenue. So, we're focused on executing to deliver the top line. And at the same time, we're taking action to run our businesses more efficiently to counter the impacts that inflation and currency are having on our margins. And we've been implementing an extensive transformation to improve the durability of our growth.

We've changed our operating model, brought in extensive new leadership, increased capital allocation to our highest growth opportunities, and are implementing a culture based on execution, speed and playing to win. And now we're positioning the company to take advantage of our scale in areas of operations and supply chain, core technology and how we go to market with large customers around the globe.

You're already seeing results from this today. And as we go forward, our focus is on translating the durable revenue growth that we've established into durable earnings power. This is a winning formula for creating value for shareholders, and we are laser focused on making that happen.

Now, 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

[Operator]

[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 Surgical and Endoscopy Businesses; 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. We'll pause for a few seconds to assemble the queue. We'll take the first question from Robbie Marcus at J.P. Morgan. Robbie, please go ahead.

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

Oh, great. Good morning, everyone, and thank you for taking the question. Maybe I'll ask both of them upfront. The first, Geoff, you talked about how most of the headwinds are largely mitigated. I look at the guidance implied in the second half of the year. It's a point of growth or so below the first half. So maybe just talk about how we should think about the lower growth in the second half versus the first half and the reasons for that. And then part B, if I look to 2025 or fiscal year '25, the street has you pretty close to your long-range plan of 5% plus on the top and 8% plus on the bottom. Is that the right way to think about next year? Are there any headwinds or tailwinds we should be thinking about here, like potential dilution from the monitoring business? Just want to try and get street numbers correct as we head into year end. Thanks so much.

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

Sure. Well, let me kick it off and thanks for the questions, Robbie. I'll kick it off and then hand it over to Karen. In terms of the headwinds being mitigated, what I'd say is the markets are pretty stable, especially relative to what we've seen over the last couple of years with procedures. I think back to normal growth, and the staffing issues that were hurting the procedural growth are, I think, more or less under control. Pricing has been stable. We can talk China later. We're working through the China VBP, but that's largely behind us. Still a little bit more to go, but largely behind us, and then our own internal -- the changes to our global operations and supply chain. That was a big one for us and has been a big one, and we're seeing our teams perform much better. And like I said, we're turning that into a strength for us, a strategic, long-term strength and our supplies in a much better situation.

And then of course, our pipeline is coming in, and I'm sure we'll get into that in the call here with a lot of new approvals plus the prior approvals we're starting to launch and they're having meaningful uptakes. So, there's where the optimism is. In terms of how to think about the back half versus the first half and then getting into FY '25, I'll turn that over to Karen.

[Karen Parkhill, Chief Financial Officer at Medtronic]

Yeah. Thanks Geoff and Robbie. So just on the back half, Robbie, our comps do get a little tougher, as you know. But we've got a really strong innovation pipeline that we talked about, and that's driving growth acceleration actually from the first half to the second half. You know, we've got our diabetes business returning to growth in the second half. We talked about our extensive pipeline, EV-ICD, PFA, Hugo, Evolut FX, and now the Ardian approval. And so, we're confident in this growth acceleration, and we're confident that that's going to continue beyond the back half of next year. We think about FY '25, you know, it's still early, we have two quarters left in this fiscal year, and we're laser focused on delivering the rest of this year. We're also at the beginning of our planning process, so we're not ready to give specifics. But I do know that all of you are working on your calendar year models for our competitors. So happy to give you some perspective based on what we know today and what we're thinking about.

And I'll start with revenue, because we've been focused on consistently delivering that mid-single digit revenue growth, and you've seen us do that for four quarters now. Our new full year guide for this fiscal year is four and three quarters. And as I mentioned, we've got the strength of those numerous product approvals in big markets that are launching around the world to help drive our back half growth. And obviously we're confident that strength will continue into next year and beyond.

On margins and down the P&L, there are some puts and takes. We've got inflation stabilizing a bit, but it's still higher than historical. But again, it's stabilizing. Currency is dynamic and as you know, the U.S. dollar has been strong, so we're likely facing a headwind from FX, but we'll see how that shakes out. Global tax reform will likely be a headwind, but as always, we're focused on driving offsets everywhere that we can. Geoff talked about it, we've made progress on cost of goods sold and cost out, starting with centralizing our global Ops team. We have work to do, but those teams now have tangible programs in place to drive that work, and we'll continue to drive pricing as an important lever. We've built a new muscle on pricing, and our focus is to keep it strong.

We've been working hard on controlling expenses, and that includes maintaining discipline on our largest driver of our expense, which is our headcount. So, I hope that gives you some color on just the puts and takes. But to summarize, I'll remind you what hasn't changed, and that's our long-range commitment of driving durable, mid-single digit top growth of driving leverage down the P&L, of driving a strong free cash conversion and a growing dividend, which all combined, ultimately delivers a double-digit total shareholder return.

You know, what has changed, though, is our progress toward that commitment. You've already seen us at mid-single digit top line. We've talked about the strong pipeline that gives us confidence in its durability. And obviously we've talked about the programs we have in place, whether it's in headcount management, cogs, cost down, pricing discipline, and they're all levers to help us offset the headwinds, and over time establish that same durability on the bottom line.

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

Thanks, Robbie. We'll take the next question, please. Brad.

[Operator]

The next question comes from Travis Steed at Bank of America. Travis, please go ahead.

[Travis Steed, Analyst at Bank of America]

Hey, everybody. Congrats on a good quarter. Karen, just to sum up all those comments on FY '24, I heard the leverage down the P&L comment. It sounds like, based on what we know today, unless there's some kind of major surprise, there's still a good ability for there to be enough offsets to drive EPS growth faster than revenue growth. Just want to kind of make sure that's a fair comment. And Geoff, I did want to follow up on your thoughts on GLP-1s post the select trial. Curious if there's any color you'd add on the select trial and the cardio endpoints and diabetes prevention that maybe didn't mention in the prepared remarks.

[Karen Parkhill, Chief Financial Officer at Medtronic]

Yeah, Travis, thanks for the question. Clearly, you know, next year and beyond, we're focused on driving that leverage down the P&L that I talked about. And obviously, when you drive leverage, your bottom line is faster than your top line. But at this stage, it's still early. We're at the beginning of our planning process, and we're going to give you more on FY '25 as we are ready to guide.

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

Hey, Travis. Good to hear from you. On GLP-1s, first of all, I just want to make it clear that we see that it's an exciting class of drugs with a large opportunity. And I'm sure, just like you, I talked to many patients that are benefiting from these drugs. From a weight perspective, from a mental health perspective, it's pretty amazing. That being said, we've done a lot of work, and outside of the near-term temporary impact on bariatric surgery market, we don't see these drugs impacting our growth outlook, even in the long term. And on the bariatric piece, as we mentioned, it's a small part of our revenue, low single digits, and the rate of decline has stabilized there, and I think we see that coming back here in the coming year even.

So, we did do a lot of work here, and it was, like I said, science based. And looking at epidemiology and really digging into select, what we do have on the call here are our Chief Medical Officer, Dr. Laura Mauri. And I thought I'd maybe kind of call her in here, bring in a relief picture here on that question to talk a little bit more about select and kind of what we're seeing out of that. So, Laura, can you chime in here?

[Laura Mauri, Chief Medical Officer at Medtronic]

Sure. Thanks, Geoff. Yeah, Travis, the select trial results that were presented at AHA gave us a lot more detail beyond the top line that we heard about back in August to really look at the endpoints and look at the drug adherence, understand the details of the trial results, and as you know, these were obese patients with a history of cardiovascular disease. And as Geoff said, this is a very important advance for this patient population. But the results didn't change our overall impression that there will be a negligible effect on the growth of cardiovascular procedure volumes. And that's based on a couple of things that we saw in the detailed results. First, the number needed to treat was much higher, and that means it's setting a higher bar for treatment compared with other things that are used in guidelines. And then we saw that there was a lack of effect on cardiovascular death, and that's something that if it had been present, would have spurred more adoption. And the lack of that is important because it will not spur the wide adoption and coverage that we might have been looking at if that had been positive.

And then the only effect on the composite endpoint was non-fatal MI, not stroke or cardiovascular death, as I mentioned. And as you know, the discontinuation rates were in nearly a third of patients due to the nausea and GI side effects. And clearly, we know from practice that rates of adherence are even lower and that results in lower treatment effects. And then there were a couple of interesting findings in the trial. As Geoff mentioned earlier, the higher BMI population didn't seem to have as much benefit, and there was no significant treatment effect in the North American subgroup, which is certainly something that I think we'll want to understand better going forward.

So, using a range of assumptions, we updated our models across the major cardiovascular procedures and the inputs to that were looking at U.S. procedure volume across different procedure areas using data on the prevalence of obesity for each of these procedure populations, and then a range of penetration and adherence assumptions all the way up to including what we've seen over time with statins, which is, as you know, are really well tolerated and just freely available and part of guidelines for the past 30 years.

And then we also input, obviously, the risk reduction seen in each of the endpoints for the select trial or literature based on weight loss to look at treatment effects. And the bottom line is that the reduction to TAM growth over the next 10 to 30 years is really negligible on the cardiovascular procedure outlook.

I think it's really important to also note what this analysis doesn't include, and that's that there will probably be offsets in the markets that are really under-penetrated or new like PFA or Ardian because of the growth -- the rapid growth in those areas. And then there's, in fact, potential upside for patients and procedure growth because of the potentially longer survival or lower BMI that makes a greater funnel of patients eligible for cardiovascular procedures.

So, I'll pass it back to Geoff. I know there was a question as well about the effect on hemoglobin A1c.

[Travis Steed, Analyst at Bank of America]

Yeah. Well, thank you, Laura. And while we're on the topic, maybe on that one. Any comments on diabetes relative to GLP-1s?

[Que Dallara, EVP and President of Diabetes at Medtronic]

Yes, I mean, like Laura mentioned, we spent quite a bit of time studying this, and I think there's some evidence from select that would say there may be a slowdown in the pre-diabetic population towards insulin dependency, and maybe some in type II will come off insulin, but we believe this number to be very small, and more than offset by the fact that there is low penetration of type II using AID, and the fact that when you look at the funnel of three to four million who require basal insulin with 25 million non-insulin type IIs as well as the over 100 million pre-diabetic population, it doesn't change our point of view on the long-term size of the market as well as the growth rates. And as Geoff mentioned at the beginning, the majority of our business, more than 90%, is in type I. And so, we remain pretty optimistic about the growth and market profile in diabetes.

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

All right. Thanks. Que. I mean, Travis and others, as you can see, beyond the fact that the areas that we get questions on type II intensive, hypertension, AFib, obesity, besides the fact these are just woefully underpenetrated from a medtech perspective. We've done all the analysis that Laura and Que just gave you the tip of the iceberg of, and that's we feel strongly that we don't see these drugs impacting Medtronic's growth medium or long term. So, I hope that answers your question and then some.

[Travis Steed, Analyst at Bank of America]

Yeah, super thorough answer. Thanks a lot.

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

Thanks, Travis. Next question, please, Brad.

[Operator]

We'll take the next question from Larry Biegelsen at Wells Fargo Securities. Larry, please go ahead.

[Larry Biegelsen, Analyst at Wells Fargo Securities]

Good morning. Thanks for taking the question. Just two product questions for me, one for Sean on Ardian. Congratulations. Sean, can you talk about the ASP, the reimbursement pathway and the ramp? And for Bret, the slides talked about completing the six-month primary endpoint on the Pivotal Titan 2 ITNS trial. Does FDA want 12-month data? Could you talk about the form factor here, and how you see ITNS being positioned relative to sacral neuromodulation? Thank you.

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

Well, Larry, it's Geoff. Good to hear from you and thanks for the question. Before I turn it over to Sean on Ardian, I do want to just say, look, congratulate the team here in the cardiovascular space of Medtronic and leader's past, I mean, this has been involved -- this has been a long journey, and we are really excited about the approval. We have a lot of data here in our RCTs. We consistently saw a mean 9 mm to 10 mm mercury, absolute office blood pressure drops at the initial primary endpoints in this case of three and six months and actually more in the real-world setting, and additional drops overtime from these primary assessments. So, this is a game changer. And look, this is as compelling as the data is and as much as we have, it doesn't even tell the whole story. I mean, you talk to physicians out there that are involved in our trials, and the excitement is palpable. And patients, we have a number of patients that have been on this for years, and talking to them how it's changed their life and we're actually having a patient come in and talk to the entire company here in a couple of weeks. It's very exciting, a big opportunity for patients and a real big opportunity for us.

So, getting into some of the specifics, you asked about reimbursement, I'll turn that over to Sean and then we can go to Bret to talk about I believe you're asking about the tibial opportunity, but why don't we start with Sean.

[Sean Salmon, EVP and President of the Cardiovascular Portfolio at Medtronic]

Larry, thanks for the question. As you know, the ramp is going to be highly gated by reimbursement, and we've been working that in parallel with the regulatory approval all along. We see the player split to be roughly 50:50 between Medicare and commercial payers or private insurance. And we've been, of course, pursuing both local and national coverage determinations from Medicare. And that's an important input into the private payer decisions that will happen state by state and payer by payer. We've been in contact with those private payers, the largest ones certainly, and the response so far has been very open and willing to engage with us to understand our data. And what's particularly of interest to them is the long-term data, which is atypical for a new therapy like this to have thousands of patients out three years from the therapy. So that's encouraging.

Of course, you know, the Medicare population is the most important for us, and to your question, there are these alternative pathways that have been established by Medicare for temporary add-on payments both in the in-patient setting with NTAP or the New Technology Add-On Payment, as well as a net outpatient setting for Transitional Passthrough Payments or TPP. And given that the Simplicity Spiral system is a breakthrough device designation, we will avail ourselves to those pathways for approval over that two- and three-year period as we work to establish more permanent reimbursement for like a national coverage determination.

On that front, there is this TCET pathway or the Transitional Coverage for Emerging Therapies, that we're going to avail ourselves to. It's not finalized yet. We look forward to that ruling coming out. We've seen the commentary, it's been largely very positive along the way and in line with what we had been suggesting both to CMS and the Biden administration as well as other stakeholders along the way.

And of course, CMS is also considering other refinements to coverage with evidence development programs that we've used successfully as we've established many, many therapies, as you know, including TAVR, Micro, ICD, CRT devices overtime, and we'll avail ourselves to those as well. So, rest assured, we're working hard on reimbursement. It's really critical for the ramp of this technology, and we're getting a good reception so far.

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

Okay. Thanks, Sean. Brett, you want to answer part two here?

[Brett Wall, EVP and President of the Neuroscience Portfolio at Medtronic]

Yeah, absolutely. Larry, good to hear your voice. Thanks for the question. Titan 2 study was a six-month follow up with the actual study design, and we will follow those patients for 24 months. So, we'll be following those patients and have additional data as well. The form factor is about 2.8 cubic centimeters, really about the size of roughly half a stick of gum, and it fits in the ankle, same place for everyone. This opens up a significant patient population. There's over 4 million people in the United States that have discontinued their dual drug therapy or failed two drugs. And they are now receiving continence devices at home, adult continence products as opposed to seeking additional therapy. This is a 15-minute procedure. We now have established Category 3 Reimbursement, and we'll be utilizing that to further develop out the reimbursement profile.

This particular product and technology opens up substantial population that is not seeking help or seeking a therapy right now. We're in a modular submission. We'll be submitting the data here shortly. And this is an exciting new technology that opens up this field and will contribute to its ongoing growth.

[Travis Steed, Analyst at Bank of America]

Okay. Thanks, Bret.

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

Thanks, Bret. And thanks, Larry. And a reminder to the analysts to stick to one question and one related follow up if needed. We'll take the next question, please, Brad.

[Operator]

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

[Vijay Kumar, Analyst at Evercore ISI]

Fantastic. Hi, Geoff, thanks for taking the question. I had two product related questions here. First one, just at a high level, right? You had three pretty meaningful product approvals in the past few months between EV-ICD, PFA and your Ardian approval. Right. You're already doing mid singles. With all of these incremental growth drivers coming in, is that now a mid singles Plus? I'm just curious how you are thinking about this new product opportunities?

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

Well, thanks for the question, Vijay, and good to hear from you. And thanks for pointing out the robust nature of the approvals. And these are really, we believe, and as you saw in the commentary, unquestionably differentiated products, and in large markets and growing markets that we have a high confidence in. And this gets to our commitment that make this growth durable. And as we've seen over the last couple of years, whether it be market conditions or internal things which we are working so hard to make sure these internal boogeymen just disappear through changing our fundamentals. This breadth of approvals in these high growth markets, I believe will help me for the first time sleep well, because it gives you the durability that we're talking about in that revenue number, which is so important.

Everything flows from there. So, at this point, before we start talking about plus, I just want to make sure that we are very durable and reliable mid-single digit growers in different types of environments, good and less good, and then we can flow from there about leverage on the P&L and things like that. So that's my overview on the pipeline in general.

[Vijay Kumar, Analyst at Evercore ISI]

And maybe my related product question here, perhaps from Mike on robotics here. You mentioned installed base went up in Europe. Any sense on what the size of that installed base is in this U.S. clinical trial? You said it's on plan, but any sense on when this trial might end, perhaps timing for an FDA approval?

[Mike Marinaro, EVP and President of the Surgical and Endoscopy Businesses at Medtronic]

Thanks for the question, Vijay. First, we are continuing forward with our installs, have added to the install base. We're not quoting numbers of installations at this time, but we are increasing on a quarter-on-quarter basis. Our procedure volume is picking up on a quarter-on-quarter basis. As we work through availability of our instruments and then getting the system into the U.S., we'll really start to see acceleration of our program. Geoff commented and you just noted that the EXPAND Euro study is on track, and we're very excited in speaking with our investigators there and they're enthusiastic about the product and the program, and so that continues forward. We're not going to give timelines of U.S. approval for that, but I will tell you it's proceeding according to plan.

And then as Geoff noted, we're very excited about the hernia IDE approval, which allows us to take a big step into general surgery more quickly than we had anticipated and to start to engage the general surgeons with Hugo here in the United States in a segment where we are very active today. Of course, we have a large business and sales channel in the area of hernia repair. There's a real hunger for capacity and a growing volume there in hernia in the United States. And so now running these IDEs in parallel will allow us to start to really pick up momentum as we contemplate the entry into the U.S. market.

So, we are on plan, not giving specific dates for approval yet, but also very excited about the opportunity to move into the general surgery, and in with the general surgeon with this hernia IDE approval.

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

Thanks guys. Thanks, Mike. I mean, I know there's a lot of interest in this and look, I just emphasize Mike's comments. Step one was to have a robot that has the capabilities and strong physician acceptance, and we feel strongly that we have that. And now we're building up our experience primarily in Europe and of operating the robot out in the wild and then really, as Mike mentioned, building out that instrument portfolio and executing on the U.S. trial so that we can launch in the US. That'll be between the U.S. and some new instruments that'll really drive a lot of growth here. So anyway, more to come on that, but thanks for the question, Vijay.

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

Thanks, Vijay. Next question, please, Brad.

[Operator]

The next question comes from Kristen Stewart at CL King. Kristen, please go ahead.

[Kristen Stewart, Analyst at CL King]

Thanks for taking my question. I was just wondering if you could provide any updates on the patient monitoring, respiratory interventions, Karen.

[Karen Parkhill, Chief Financial Officer at Medtronic]

Yeah, Thanks, Kristen. For the know, we're continuing to work on the separation of that, and our focus through all of it is to maximize shareholder value. No big updates.

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

Thanks, Kristen. Next question, Brad.

[Operator]

The next question comes from Matt O'Brien at Piper Sandler. Matt, please go ahead.

[Matthew O'Brien, Analyst at Piper Sandler Companies]

Morning. Can you hear me, okay? Can you guys hear me?

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

Yeah, we can hear you, Matt.

[Matthew O'Brien, Analyst at Piper Sandler Companies]

Okay, thank you. So just one question. Geoff, for you specifically. You're a $30 billion plus revenue company, but you've talked about more tuck-in acquisitions historically. Just given your size, given the strength in terms of new product flow, I'm just wondering if now is the time to be more aggressive from an M&A perspective. Just given the pullback that we've seen in some of these -- on the public company side of things, just to be able to do a bigger deal to really solidify your growth algorithm going forward. Is now the time to be more aggressive? Are you more amenable to doing bigger deals now, just given strong balance sheet, kind of, got the operating model together, etc. Thank you.

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

Yeah, thanks for the question, Matt. And yeah, clearly, I think you're seeing asset prices come down, and it's a tough operating environment. I think they're going to continue to come down in the mid cap space in particular and below. And we definitely have the capabilities, as you pointed out, to do bigger deals. All that being said, our focus still is on tuck-ins and we've got a lot of big organic or now organic programs between just Ardian, the robot, PFA, diabetes, I mean, the list goes on. There's a lot of big organic pipeline going up against these high-growth markets that we're really focused on. And then I would augment that with the appropriate tuck-ins. So, I don't think we're really focused on and we're not going to signal that we're focused on any kind of bigger deals at this point.

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

Okay. Thanks, Matt. I think we have time; I know we're running a little bit long, but let's take two more questions, please, Brad.

[Operator]

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

[Rich Newitter, Analyst at Truist Financial]

Hi, thanks for taking the questions. We saw just more broadly in medtech, a little bit of seasonality or a weaker, I think, third quarter for a number of your competitors play out. Just wondering if you could comment on the trend throughout the quarter. Was August un-seasonally kind of weaker than what you would have thought? And what's been the normal pickup? Is it stronger than expected into the 4Q, especially if you could talk about kind of exit trends from September into October. Thank you.

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

Sure. Thanks for the question, Rich. I'm going to ask Karen to answer that one.

[Karen Parkhill, Chief Financial Officer at Medtronic]

Yeah, thanks, Rich. I would say we saw strength throughout the second quarter, no matter what month you looked at. And I think that's driven in part by just the strength of our product offering. When we look at the first few weeks of this quarter and how that's been trending, it's been trending well. We're tracking to the expectations that we set in our guidance at this stage.

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

Thanks, Rich. We'll take the last question, please, Brad.

[Operator]

Final question comes from Shagun Singh at RBC Capital Markets. Shagun, please go ahead.

[Shagun Singh, Analyst at RBC Capital Markets]

Great. Thank you so much for taking the question. Just, I guess, a follow up on Hugo. One of your competitors recently showcased their surgical robot that had an invisible design and twin motion capabilities. I'm just wondering what your thoughts are on the competitive landscape. Do you see it as a rising tide or just how do you think about your technology offering versus competition? And then I was just wondering if it's possible to get any more specific color on how October and November is shaping out. Thank you for taking the questions.

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

Well, thanks for the question. I'm going to ask Mike to take the Hugo question, and I'll follow up on that one.

[Mike Marinaro, EVP and President of the Surgical and Endoscopy Businesses at Medtronic]

Good. Thanks, Shagun. So, we were very interested to see the latest developments from our competitor here relative to their program, and I'll say that they were about as expected. No surprises there. We continue to be very excited and optimistic about the differentiation of our program with an open console, with a modular design, with the ability to have flexibility in terms of location or site of care, which is highly differentiated from what we heard there in their discussions as well as what we see in the market today. And so, we see that differentiation continue and the reasons that our customers like Hugo to continue to be differentiated reasons. More broadly speaking, though, the good news is that there continues to be just real interest in expanding the penetration of robotics across multiple fields in surgery, and we're seeing continued increase in procedural volumes on a quarter-on-quarter basis. And so, it's good news for the field as that interest grows. So, we're well positioned and the field continues to expand, which is a good story for Medtronic.

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

Yeah. And just to build on that, we call it robotics, but I would argue it's broader than that. And this isn't the first time we're out to change the dynamics of an entire market. That's what we're doing in the spine market right now. And then it goes beyond robotics. It gets into interoperative imaging or visualization, navigation, pre-surgical AI based planning. In Mike's world here with Hugo, we've got Touch Surgery Enterprise, which is a leading digital platform with AI driven digital platform, like you're seeing in spine that's played out over the last couple of years. It's changing the competitive dynamics, what's important in the marketplace for physicians and even patients, and you're seeing the impact as what you're seeing in the spine market, as many competitors, it takes a lot of expertise, it takes a lot of capital to make this happen, and you're seeing competitors fall by the wayside. I know there's been a big one here recently with NuVasive and Globus coming together, and we'll see how that plays out. But I believe we've demonstrated an ability to do this. And this is the kind of experience, and I know we're up against a big competitor and Intuitive in the surgical space, but we believe we've got a lot to offer here, and we are going to drive a change in how people think about the space and the competitive dynamics. And we're really confident and excited about that.

So, with that, I think we'll bring the call to a close. Thanks for sticking with us a little longer, and I really appreciate the questions and the support and continued interest in Medtronic. And we look forward to updating you on our continued progress on our Q3 earnings broadcast, which we anticipate holding on Tuesday, February 20th.

With that, thanks for joining us today, and for those in the U.S., I'd like to wish you and your families a very happy Thanksgiving this week. And enjoy the holiday and stay safe. Thank you.

Participants

Corporate Executives

• Ryan Weispfenning, Vice President and Head of Medtronic Investor Relations
• Geoff Martha, Chairman and Chief Executive Officer
• Karen Parkhill, Chief Financial Officer
• Laura Mauri, Chief Medical Officer
• Que Dallara, EVP and President of Diabetes
• Sean Salmon, EVP and President of the Cardiovascular Portfolio
• Brett Wall, EVP and President of the Neuroscience Portfolio
• Mike Marinaro, EVP and President of the Surgical and Endoscopy Businesses

Analysts

• Robert Marcus, J.P. Morgan
• Travis Steed, Bank of America Co.
• Larry Biegelsen, Wells Fargo Securities
• Vijay Kumar, Evercore ISI
• Kristen Stewart, CL King
• Matthew O'Brien, Piper Sandler Companies
• Rich Newitter, Truist Financial Co.
• Shagun Singh, RBC Capital Markets