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Medtronic Q2 2023 Earnings Call Transcript


Listen to Conference Call View Latest SEC 10-K Filing

Participants

Corporate Executives

  • Ryan Weispfenning
    Vice President & Head of Investor Relations
  • Geoffrey Martha
    Chairman & Chief Executive Officer
  • Karen Parkhill
    Executive Vice President & Chief Financial Officer
  • Brad Welnick
    Senior Director, Investor Relations
  • Sean Salmon
    Executive Vice President and President of the Cardiovascular portfolio
  • Que Dallara
    Executive Vice President and President of the Diabetes Operating Unit
  • Bob White
    Executive Vice President and President of the Medical Surgical portfolio

Presentation

Ryan Weispfenning
Vice President & Head of Investor Relations at Medtronic

Good morning. I'm, Ryan Weispfenning, Vice President and Head of Medtronic Investor Relations, and welcome to snowing Minneapolis. I appreciate that you're joining us today for Medtronic's Fiscal Year 2023 Second Quarter Earnings Video 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 28, 2022, as well as our outlook for the remainder of the fiscal year. After our prepared remarks, the Executive VPs for each of our four segments will join us, and we'll 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 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 revenue from our Q1 acquisition of Intersect ENT. References to sequential revenue changes compared to the first quarter of fiscal '23 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 2022 compared to the third calendar quarter of 2021, unless otherwise stated.

Reconciliations of all non-GAAP financial measures can be found on 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.

Geoffrey Martha
Chairman & Chief Executive Officer at Medtronic

Hello, everyone, and thank you for joining us today as we discuss our Q2 results and outlook. Our Q2 organic constant currency revenue growth of 2.2% came in about 1 point below expectations due to a slower than expected recovery in both procedure volumes in certain markets and in our supply chain.

In terms of reported revenue, the continued strength of the dollar over the course of the quarter drove over half the difference to expectations. Now despite the top line results, we were able to control expenses and deliver EPS at the high-end of our guidance range. We also issued guidance for the back half of our fiscal year this morning. We expect continued acceleration in organic revenue growth in the second half although less than previously anticipated, and this partially flows through the EPS.

Now this is something that I don't take lightly. Delivering on our expectations is important to building and maintaining trust and credibility with you. Karen will walk you through the details, but some of our markets and some of our supply constraints recovered more slowly than we expected in the quarter, and that along with incremental China volume-based procurements, let us to reduce our expectations. While the current operating environment remains challenging, we had strong growth in several businesses and geographies, where our strategy, our operating model and execution are yielding solid results.

We have near-term product catalysts in our pipeline. We are decisively allocating capital internally and selectively making focused acquisitions. We're making improvements to the operational health of the company and we're streamlining the company structure and taking cost out. All of this gives us confidence that we're on the path to creating durable growth and shareholder value.

Now diving deeper into our Q2 results. For reported revenue, as I said earlier, currency drove over half the miss to consensus. Organically, the miss was primarily split evenly between two challenges. One, procedure volumes in some markets have been slower to return to normal levels. And two, some of our supply challenges have persisted longer than we anticipated. With regard to procedure volumes in addition to an incremental China VBP, we are still seeing lower volumes in elective coronary PCI, GI procedures, TAVR, spinal cord stim, and some less emergent surgical procedures. The slower than anticipated recovery in procedure volumes primarily occurred in developed markets. As healthcare systems continue to work through staffing and other challenges.

Now with regard to supply, we've made meaningful recovery and many of the most acute issues are now behind us, including the acute packaging issues which we highlighted last quarter. But some of the improvements did come later than we expected in Q2 and as a result, we missed cases in businesses like surgical innovations, it has delayed our expected momentum. Now focusing beyond challenges impacting our markets and product availability, we have a number of businesses, where our strategy and execution are yielding results.

Recall that we move to the new operating model two years ago, we created highly focused accountable and empowered operating units, that could move with greater speed and decisiveness. And today, we're clearly seeing the benefit of this model across many of our businesses. Starting with Cranial & Spinal Technologies. CST grew 5%, and this is despite a large negative impact from China VBP. In fact, our U.S. core spine business grew 15%. Additionally this quarter, we launched our spine technology ecosystem which we call Aible at the NASS conference.

From planning to our best-in-class implants to navigation and robotic assistance to intraoperative imaging and surgical tools up to and including patient follow-up. Aible brings spinal surgery together in one seamless and connected platform. And another highlight was our Structural Heart business, we're our TAVR business grew 15% globally, including 17% in United States. The launch of our Evolut FX valve drove 18% sequential revenue growth in our U.S. TAVR business, despite being at full market launch for only the last month of the quarter. So we expect Evolut FX to drive momentum for us over the coming quarters.

Our Cardiac Rhythm Management business continues to execute and win share, with 4% growth in this quarter. Within CRM, our pacing business grew 6% well above the market with 18% [Phonetic] growth of our micro family Leadless Pacemakers. And we're looking forward to the commercial introduction of our AURORA EV-ICD in the back half of this fiscal year. So while we have businesses where the changes we've made over the past couple of years are clearly having a positive impact, we're also focused on ensuring these efforts translate into improved performance in all of our businesses.

It's worth highlighting a few businesses, where we are making strong progress to drive future growth over the near to mid-term, and some of that already have immediate momentum. Let's take, Cardiac Ablation Solutions, a business that we expect to be a strong future growth driver. Pulsed field ablation represents a large market opportunity and we're looking forward to seeing our PULSED AF pivotal trial results in the first half of next calendar year. Putting us on the path to be one of the first companies with the PFA catheter in the U.S. market, which we think is under-appreciated. This is a meaningful growth opportunity for Medtronic in the next 18 to 24 months.

And as you know we closed our acquisition of Affera in August, and Affera's differentiated mapping and navigation system gives us the breadth and differentiation that we need to win share in cardiac ablation. And we expect to complete enrollment this quarter and the pivotal. This fully integrated system will be the first of its kind to offer unique catheter that can perform high density mapping and deliver both pulsed field and radiofrequency ablation in a single device.

Now in diabetes, we remain focused on resolving our warning letter. We've now completed a 100% of our warning letter commitments and have informed the FDA that we're ere ready for re-inspection. We also remain in active review with the FDA on our submission of the MiniMed 780G system with the Guardian 4 sensor. And outside the U.S., we continue to receive positive customer feedback on the performance of the 780G, which is now available in over 60 countries.

In Q2, 780G drove mid-teens growth for our diabetes business in international markets. And across diabetes, we're investing heavily in the development of multiple next-generation insulin delivery and sensor technologies. And we remain focused on restoring strong growth to this important franchise over the coming years.

Turning to our Hugo surgical robot. Now I'm sure we're going to get into this in Q&A, but we saw a lot of positive momentum this quarter as we scale manufacturing production, expand regulatory approvals and ramp installations. In addition, we just received FDA IDE approval last week on our product enhancements. Now this allows us to start our U.S. urology clinical trial by the end of the calendar year, it is a catalyst for continued progress with our international sales.

Now before I talk about our capital allocation and portfolio management. Let me share my thoughts on the R&D and opportunity. Despite the impact, we believe COVID and medication changes had on the ambulatory endpoint in on-med, the totality of the data is compelling. The large drop in office blood pressure in the Ardian arm was impressive, and it was consistent with what we've seen in our other trials.

Importantly the current standard-of-care for reducing blood pressure [Technical Issues] working, which was evident in the long-term Sprint trial results published just last month in JAMA Cardiology. Patients don't seem to stay on multi-drug therapy for long periods of time, and eventually just stop taking their medications. And that's the advantage of Ardian, it's always on. We've demonstrated that our Ardian procedure, it's safe, it's effective and it's durable. Physicians are excited and Ardian is preferred by patients. Now we've submitted our PMA to the FDA and we're looking forward to working with governments and payers in the U.S. and around the world, who are searching for improvements to control high blood pressure and avoid the costly and devastating consequences of this disease.

In addition to advancing our pipeline, we're focused on decisively allocating capital and streamlining the company to deliver durable growth. We're freeing up resources to invest more in R&D, feeding our fast growing businesses in areas where we can see the strongest returns, Cardiac Ablation Solutions and diabetes are two clear examples of this. We're also making moves with our portfolio to focus our company and our capital on opportunities that are better aligned with our long-term growth acceleration strategies.

Over the past two quarters, we've announced our intent to separate three businesses that we believe will thrive outside the company. With our Renal Care Solutions business, we're progressing on the separation forming a new kidney health technology company together with DaVita. We continue to expect this transaction to close in calendar 2023. And last month, we announced our intention to separate our combined patient monitoring and respiratory interventions business. We remain focused on active portfolio management, evaluating both potential additions and subtractions to further accelerate our growth and create value for our shareholders.

Now with that, I'll turn it over to Karen to discuss our second quarter financial performance and our guidance. Karen?

Karen Parkhill
Executive Vice President & Chief Financial Officer at Medtronic

Thank you, Geoff. Our second quarter organic revenue increased 2.2%, up significantly from Q1, but below our guidance range given the challenges Geoff mentioned. Yes, with a focus on expenses, our adjusted EPS of $1.30 landed at the upper end of our guidance range. Currency had a significantly unfavorable impact of 5.8% on our reported revenue growth. Our FX hedges mitigated that impact on the bottom line. With EPS down only $0.01 or 80 basis points from currency.

Looking at our results from a geographic perspective. Our U.S. revenue grew 1%. Our non-U.S. developed increased 3%. And emerging markets grew 4%. Our emerging markets growth continued to be affected by China which declined 9% given the impact of a national tender in our spine business and several provincial tenders in certain other businesses. However, we continue to see strong double-digit growth in our other markets, including mid-20s growth in Eastern Europe, and mid-teens growth in Latin America. In fact, excluding China our emerging markets grew 15%.

Turning to our margins. Our adjusted gross margin of 67.6% declined 120 basis points from inflationary pressures in materials, direct labor, freight and utilities. We expect these inflationary pressures to continue and to impact the back half of this fiscal year more than what we experienced in the first half. Our adjusted operating margin of 26.6% declined 40 basis points, including 120 basis point benefit from our currency hedging program, compared to the first quarter, our operating margin improved 270 basis points, given accelerated revenue growth. We expect sequential improvement throughout the fiscal year.

We continue to maintain a strong balance sheet. I would note that the vast majority of our debt is fixed at low rates as we move into a higher rate environment. Regarding our capital allocation, we continue to balance investing for the future with returning capital to shareholders. And we remain committed to our dividend and to returning a minimum of 50% of our free cash flow to our shareholders.

Now turning to our guidance. Today, we said our second half revenue guidance at 3.5% to 4% organic, which excludes currency movement and revenue from our Intersect ENT acquisition. If recent exchange rates hold, foreign currency would now have a negative impact on our back half revenue of $930 million to $1.03 billion. Our back half guidance translates into a reduction of our annual guidance, driven by a slower pace of market and supply recovery.

On market, we are expecting incremental provincial tenders in China, particularly in stapling and cardiac ablation. And Geoff referenced earlier that some procedure volumes in the second quarter didn't recover as quickly as we were expecting. So at this point, we are assuming no incremental improvement in the back half. On supply, while we have had a meaningful recovery, it came later than anticipated, particularly in SI and cardiac diagnostics. And that simply delays our pace of recovery ahead.

By segment, in the back half, the majority of the reduction is in our Medical Surgical portfolio, which we now expect to be flat-to-up 0.5%. We expect cardiovascular to grow 5.25% to 5.75%. Neuroscience to grow 6% to 6.5%. And diabetes to decline in the low-single digits, all on an organic basis. Our total company revenue guidance does assume continued revenue growth acceleration, which we saw in each month of the second quarter. We expect the third quarter growth rate to be better than the second. And the fourth quarter better than the third.

We will have easing comparisons in ventilators, improving supply in certain businesses like cardiac diagnostics and SI. And the benefit from product launches like Evolut FX and EV-ICD. In the third quarter, we expect organic revenue growth in the range of 2.5% to 3%, an acceleration from the second quarter. And assuming recent exchange rates hold, the third quarter would have a currency headwind between $460 million and $510 million. By segment and on an organic basis, we expect Medical Surgical to be down 2% to 2.5%, an improvement from the second quarter, given lesser event headwinds and the impact of the flu season.

Cardiovascular to grow 4.75% to 5.25% on the continued rollout of Evolut FX and LINQ II. Neuroscience to grow 5.75% to 6.25%, improving from the prior quarter with less VBP impact in spine. And diabetes to decline in the low single-digits. On the bottom line, we are driving significant expense reduction throughout the company to help offset the lower revenue and continued inflation impact. And now expect fiscal '23 non-GAAP diluted EPS in the range of $5.25 to $5.30. That range includes an unfavorable impact of currency of approximately $0.18 at recent rates.

For the third quarter, we expect non-GAAP diluted EPS to be in the range of $1.25 to $1.27, including an FX headwind of about $0.05 at recent rates. Amidst the macro environmental headwinds we face from inflation, China VBP, softer procedure volumes in certain markets and currency. We are laser focused on driving operational and expense efficiencies. We are also committed to invest appropriately for the long-term, allocating capital to our most promising growth drivers and executing tuck-in acquisitions designed to reach more patients and create value for our shareholders.

As we approach Thanksgiving, I want to share my gratitude to our employees who have been committed, particularly during these challenging times to deliver on our mission, to alleviate pain, restore health and extend life for millions of people around the world.

Back to you Geoff.

Geoffrey Martha
Chairman & Chief Executive Officer at Medtronic

Thank you, Karen. Now before we open the lines for questions, I want you to know that our growth rate and our consistency are not where we want them to be. That's why I shared with you our aggressive agenda to transform this company two years ago, when I became CEO. We embarked on a plan of implementing a new operating model, eliminating the bureaucracy of our groups and forming more nimble operating units, while at the same time, learning to leverage our scale.

We set in motion a new performance-driven culture, and we changed our incentive plans to reward new behaviors and performance. We brought in new leaders to inject new ways of thinking in the organization, and we implemented new capital allocation and portfolio management processes. Now these changes take time, and we face setbacks along the way that have slowed us down. Some are environmental like COVID recovery rates, raw material shortfalls and Chinese procurement policy, while other setbacks are of our own doing, like our quality and operational challenges and the pace of improvement we anticipated.

Look, I know, we have more work to do here. but we understand the root causes that led to the years of underperformance from this company. And our aggressive transformation agenda is designed to fix these issues. I know we will get this right, choosing the right markets, being more efficient and productive with our resources, empowering businesses and increasing accountability, improving our quality, our manufacturing and our supply chain, and turning our size and scale into an advantage.

And I know we are on the right path. The progress we've made so far gives me that confidence. We have experienced leaders, a compelling pipeline and positions of strength in some of the most attractive MedTech markets, which address significant unmet needs for patients. We will execute on our plan to deliver durable growth that we began two years ago. And as we do, we will create tremendous value for all of our stakeholders.

So now let's move to Q&A. We're going to try to get to as many analysts as possible, so we ask you to 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
Senior Director, Investor Relations at Medtronic

[Operator Instructions] For today's session, Geoff, Karen and Ryan are joined by Que Dallara, EVP and President of the Diabetes operating unit; Sean Salmon, EVP and President of the Cardiovascular portfolio; Brett Wall, EVP and President of the Neuroscience portfolio; and Bob White, EVP and President of the Medical Surgical portfolio. [Operator Instructions]

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

Robert Marcus
Analyst at JPMorgan Chase & Co.

Great. Thanks for taking the questions. Maybe I'll ask a two parter upfront. The miss in the top line in the quarter, and the guide down was pretty significant for the second half of the year. You point to slowing procedure growth or not a recovery that you're hoping for, yet it's different from what we're hearing from most of your peers in terms of stabilizing volume growth. So I was hoping you could spend more time. Walk us through what Medtronic is seeing and maybe why it's a little different relative to peers in terms of the recovery and the stabilization in volumes?

And then as we think out to next year and fiscal '24, can you give some thoughts on the last call about FX and how we should be thinking about growth for next year? Any updates to that growth? And does it change with the updated second half guidance range? Thanks a lot.

Geoffrey Martha
Chairman & Chief Executive Officer at Medtronic

Okay. Thanks, Robbie. Okay. I saw three parts there. I'm going to ask Karen to chime in to help me here on this one, but provide some details. But on the miss, like we said in the commentary, the primary issue is the pace of the recovery and there is the two buckets. There is the pace of our supply recovery, which we did make quite a bit of progress there and they got over the most acute issues that were plaguing us, but happened a little -- it happened late in the quarter and pushed out our momentum, which gets to the second part of your question, which is the effects the guide down.

The other bucket is part of your second question as well as on the markets. Many of our businesses are back, the majority of them are back to the pre-COVID level of their markets. But there are some that are not. And I'll let Karen walk through those and we were -- we just overstated what that market recovery would be, and we'll walk you through those and how those impact the second quarter -- the second half. Karen, do you want to...

Karen Parkhill
Executive Vice President & Chief Financial Officer at Medtronic

Yes. Thanks, Geoff, and thanks, Robbie. So let me talk about it more broadly than your question to, Robbie because I know you asked a specific question on procedure growth. So I'll talk about that and a little bit more broadly. So just on those two buckets. First, on our markets. Some of our markets have not returned to normal growth levels and this does account for about -- for over half of the reduction in our second half guide. You talked about competitors. You've heard from some of our competitors about a slow recovery in the Neuro market and the TAVR market.

And we're also seeing a slow recovery in basic coronary PCIs and some general surgery procedures that we mentioned in the commentary. And because these markets have not accelerated as quickly as we had anticipated, we've decided to assume volumes in the back half remain at Q2 levels. If those volumes improve in those markets, that would be upside. We also talked about related to markets that we're expecting additional provincial tenders in China. And those were ones that we believed would occur next fiscal year and are occurring sooner, particularly in stapling and cardiac ablation.

And then on the second bucket of supply that Geoff mentioned, we obviously did see meaningful improvement over the second quarter. But some of that happened late in the quarter, as we said, and that pushes out our assumptions for share recapture. For example, and particularly in SI, while we were short on supply, our competitor benefited. They stepped in to fill the shelves with our customers. We're under long-term contracts with those customers, so we will gain our share back. There is just a lag while the shelf inventory comes down.

So hopefully, that gives you some context on our guide this morning. But just to summarize, in addition to our assumptions on market growth, we assume incremental contribution from products that we've recently launched and supply that has recently improved.

On your question on FY '24, it's still early. We have two quarters to go, and we're at the beginning of our planning process. So we're not going to give FY '24 guidance on this call. But I will say a few things, including currency because that was your question. First, on the top line, you can see that we expect to exit the year with mid single-digit growth, and that's a great place to start the following year.

Second, down the P&L, we're still in a challenging operating environment with inflation, interest rates and currency as you mentioned. And on currency, we now estimate that to be a $0.36 headwind on the bottom line in FY'24. And that's obviously worse than the $0.18 that I mentioned for FY'23. And third, we're purposely driving significant expense reduction given these headwinds and given our focus on continuing to drive long-term investments for the company. So we've got several puts and takes for next fiscal year, and we plan on giving you more on FY '24 as we move through the back half.

Robert Marcus
Analyst at JPMorgan Chase & Co.

Great. Thanks for all the color.

Ryan Weispfenning
Vice President & Head of Investor Relations at Medtronic

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

Brad Welnick
Senior Director, Investor Relations at Medtronic

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

Travis Steed
Analyst at Bank of America Global Research

Hi, good morning, everybody. A little bit more color on FY '24 as it relates to China VBP. I don't know if there's any way to think about how much of the China VBP stuff hit in FY '23 versus FY '24, given some of the new ones like EP and even neuro? And then I did want a little bit more color on TAVR as well, given the strong U.S. result there. Curious if you could kind of comment a little bit on the TAVR market and also share -- I don't know if you can say how much share you think you took this quarter in U.S. TAVR?

Geoffrey Martha
Chairman & Chief Executive Officer at Medtronic

Yes. So, thanks for the question, Travis. On the -- why don't we start with the TAVR one, because we -- the market didn't grow quite as much as we had hoped, but it still was a strong growth driver for us, and we did do well from a share perspective. And why don't Sean maybe comment on that, and then we'll come back and help Karen talk about the VBP part of the question. Sean?

Sean Salmon
Executive Vice President and President of the Cardiovascular portfolio at Medtronic

Yes. Travis, we think we took about a 0.5 point of share for that -- for the full quarter, and it was really driven by the late -- the last month of the quarter where we picked up some of that momentum in October with the launch of the Evolut FX, we're in about 400 accounts on that so far. So we've got some room to run there for the back half of the year, but that's -- it is very strong. I think the underlying market is still in the kind of high-singles area. And I think that, that's really, as you know, just conspired against by the resource intensity that's required. You get this whole chain of events where you have to have a patient go-through imaging prior to their eventual procedure, and there's a lot of hand us along the way.

So those dynamics are continuing to play out around the world, but probably more in Europe and France and Germany than we see in other countries. And then we had a little bit of slowness on our own throughout -- through Japan. Japan had a flare of COVID through the summer, which was difficult. And we also had a problem where there was a sheet that we use for the procedure that we don't make that became unavailable because of supply challenges, and that led to some share loss in Japan. But overall, the TAVR momentum is really strong for us with FX launching, and we're excited about back half to get to a full release of that product into all the accounts.

Karen Parkhill
Executive Vice President & Chief Financial Officer at Medtronic

Yes, and on your China VBP question, Travis, about 15% to 20% of our back half guide down is due to the incremental China VBP being pulled forward from next year from our perspective from what we had assumed. China declined 9% in the second quarter. And that was because of an impact of VBP and spine. For the rest of this fiscal year, we don't expect China to be a material growth driver for us. And in fact, for the full year, we're expecting low single-digit declines in China. That said, as we look forward into FY '24, we'll continue to have some VBP, but I think the vast majority will be behind us, and China should be a contributor of growth again next fiscal year.

Geoffrey Martha
Chairman & Chief Executive Officer at Medtronic

Just a little bit more color on the VBP. I mean, we had visibility to these national tenders, and we factored that in earlier in the year. But we didn't have real good visibility to some of these provincial tenders that came out here in the last couple of months. And that's part of the change in the guidance. And to Karen's point, look, longer-term, we still think China is a growth market, but it's not right now, and we factored that into our guidance.

Travis Steed
Analyst at Bank of America Global Research

Great. Thank you.

Ryan Weispfenning
Vice President & Head of Investor Relations at Medtronic

Thank you, Travis. Yes, next question, please, Brad.

Brad Welnick
Senior Director, Investor Relations at Medtronic

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

Vijay Kumar
Analyst at Evercore ISI

Hey, guys. Thanks for taking my question. Geoff, my first question was on the back half guidance. When you look at 2Q, second quarter organic slightly north of 2% [Phonetic] and the back half guidance of 3.5% to 4%. How you risk is that 3.5% to 4%? Can you give us a bridge on what gets easier? I think you had some easier wind comps, etc. And I think related to that, is this -- why is Medtronic confident that this is not a firm share loss in surgical innovations?

Geoffrey Martha
Chairman & Chief Executive Officer at Medtronic

Okay. Thanks for the question, Vijay. Let me take the -- well, I'll take the share loss question first and then I'll get to the back half, and maybe I have Karen talk to that one as well. But in SI, or surgical innovations, this -- first of all, this is a contracted business with health systems and mainly us and our main competitor in that space. And in the past, there have been circumstances when the shoe is on the other foot, when our competitor had a recall and have had recalls. And we did the same thing where we got picked up some incremental revenue and some share, because the two big competitors are make up the majority of what the hospitals are buying in the surgery space. But these hospitals do honor these contracts. There's a lot that goes into them and that revenue went back after the supply situation was resolved.

And so that -- we've seen that over the years on multiple times. So these are contracted, like I said, contracted business for us. And based on our dialogue with the health systems, we're confident this is going to come back as our supply, which we mentioned. We did get past the most acute part of our supply issues in the Surgical Innovations business, with this packaging issue. It did come later in the quarter and slower momentum, but we do have momentum now, and you should see that business recover. On the back half, I'll ask Karen to provide some commentary.

Karen Parkhill
Executive Vice President & Chief Financial Officer at Medtronic

Yes. Thanks, Vijay. When we look at our back half ramp, we have new products. We've got TAVR with Evolut FX that Sean has mentioned, was only in the market for a month in Q2. So we expect continued growth from that. We've got Hugo starting to ramp. We've got our Harmony valve returning to the market. We've also got our diabetic painful neuropathy opportunity that we'll be driving more in the back half. And we've got supply returning. We've got supply returning for our LINQ II product in our cardiac diagnostics and also better supply in SI and ICDs. And we've got reduced headwinds. Our sale events and aortic graphs are normalizing. So all of those things really lead to the back half ramp. Hopefully, that's helpful.

Geoffrey Martha
Chairman & Chief Executive Officer at Medtronic

Yes. So I mean, beyond the supply returning, the back half, as Karen walked through a lot of it, is really powered by very tangible things beyond supply, product related, they're tangible and compelling.

Vijay Kumar
Analyst at Evercore ISI

That's helpful, Geoff. And then maybe one related. I think in the past, Medtronic has thought about itself as a mid single-digit top line company in light of these results. Is that mid single-digit LRP still [Technical Issues] does Medtronic [Technical Issues] supplement is growth with [Technical Issues]

Geoffrey Martha
Chairman & Chief Executive Officer at Medtronic

I didn't hear the very last part of it, does Medtronic -- but the answer to your question is, yes. I mean, the mid single-digit growth, we'll exit the year at mid single-digits. You see throughout this year, you're seeing the acceleration from the first quarter, which was the depth of our supply issues. We're really in a tough spot. We're down minus 4% than this past quarter, on an organic basis up 2% and then Karen walked you through the back half guide. But we exited the year at mid single-digits, and we believe that's durable. Like I said, based on these product launches that are here now, so immediate drivers.

And then we -- Karen brought up a list of things that are already kind of tangible in the back half, but there is a number of other things that are still coming. The AURORA EV-ICD, PFA and Afib and inceptive with ECAPs and our SCS business. And then there is the whole diabetes discussion with those products coming on in the U.S. in the next year. And the Hugo ramp will go on for a while. So there is a number of things that keep us going. And so that's why we feel good about the mid single-digit.

Ryan Weispfenning
Vice President & Head of Investor Relations at Medtronic

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

Brad Welnick
Senior Director, 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

Hey, can you guys hear me okay?

Geoffrey Martha
Chairman & Chief Executive Officer at Medtronic

Yes. Hey, Larry.

Larry Biegelsen
Analyst at Wells Fargo & Company

Hey, good morning. Thank you for taking the question. Maybe on diabetes for Que. So Que just a multipart question here. Did you ask for a variance on 780G? And if so, what was the response or when will you know? And if you don't get a variance, do you need reinspection for 780G clearance? And how long do you expect that to take? And just lastly on 780G, do you expect it to have the same impact in the U.S. as you've seen outside the U.S.? Thanks for taking the question.

Que Dallara
Executive Vice President and President of the Diabetes Operating Unit at Medtronic

Thanks, Larry. So on your first question, no, we did not ask for a variance. We've been focused on lifting the warning letter. I'm pleased to say that we are 100% complete on the warning letter commitments, and we have welcomed the FDA back in to assess our current status. So I think that's forward progress, and that's the clearest path because, obviously, it's not just 780, but it is a whole pipeline of innovation that we care about from a growth perspective. So there's progress there.

It's very hard to say timing on that. I think that's up to the agency. We know they're working very hard on that. So we anticipate progress there as well. On your question around 780G progress in international markets, we're very pleased with the double-digit performance there. We do expect to see something similar in the U.S. market once approved. We are actually doing -- we've been really happy with how 770G has performed in the U.S. market. It's helping to stabilize attrition here. And as you know, our customers have a free upgrade option with 770 once approved in the U.S. market. And sorry, Larry, I missed your third -- your second part of the question.

Larry Biegelsen
Analyst at Wells Fargo & Company

Que, that's helpful. I guess, why didn't you ask for a variant in the U.S., it seems like a kind of no risk option here? So why not ask for it? Thank you.

Que Dallara
Executive Vice President and President of the Diabetes Operating Unit at Medtronic

Primarily because as we've stated, we've been focused on really the long-term lifting up the warning letters is critically important. It's not just about 780G, but it's still about the pipeline. You know we submitted Simplera for CE Mark this year. We just submitted 780G with Simplera IDE last week. So there's a long line of innovation that we are interested in. And we were also very pleased with the progress we're making on correcting the warning letter commitment. So with those things progressing at the pace, we did not feel it was necessary to seek a variance.

Larry Biegelsen
Analyst at Wells Fargo & Company

All right. Thanks so much for taking the question.

Ryan Weispfenning
Vice President & Head of Investor Relations at Medtronic

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

Brad Welnick
Senior Director, Investor Relations at Medtronic

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

Matthew O'Brien
Analyst at Piper Sandler Companies

[Technical Issues]

Brad Welnick
Senior Director, Investor Relations at Medtronic

Okay. There seems to be a problem Matt with your audio.

Ryan Weispfenning
Vice President & Head of Investor Relations at Medtronic

Maybe we'll take the next question, Brad, and then we'll try to come back to Matt.

Brad Welnick
Senior Director, Investor Relations at Medtronic

The next question comes from Josh Jennings at Cowen & Company. Josh, please go ahead. Josh, are you there?

Josh Jennings
Analyst at Cowen & Company

Yes. Hi, can you guys hear me okay? Can you guys hear me?

Geoffrey Martha
Chairman & Chief Executive Officer at Medtronic

Yes, we can hear you, Josh.

Josh Jennings
Analyst at Cowen & Company

Okay. Great. I just want to make sure. Just one maybe for Geoff and maybe Sean as well, just on the renal denervation program and understand, I think it's well understood that the totality of evidence can get the approval. I believe that your team has had preliminary discussions with payers and you might be helpful just in terms of under better understanding your optimism that not just approval could be in hand in the next six to 12 months, but payer decisions will ultimately be positive.

And then the follow-up is just on supply and just want to make sure I'm clear on the dynamics here. And just the recovery and regaining momentum is what's left, but is the supply chain -- are those headwinds gone? And just should we be expecting -- I know you've got your team has executed on the streamlining or consolidation of operations and supply chain functions, and we start to see a benefit from those efforts in fiscal '24? Thanks for taking the questions.

Geoffrey Martha
Chairman & Chief Executive Officer at Medtronic

Maybe I'll start with the supply situation. Are the supply chain issues gone, not completely, but the biggest pain, or if you will, is behind us, especially in surgical innovations with the packaging, as I mentioned, issue. What lingers a bit would be, like we've talked about before, some semiconductor, I'd say, constraints. But the changes that we've made to our supply organization with the new leadership under Greg, the new structure, bringing in new people to help us with capabilities where we thought we weren't -- where we needed to be, implementing new systems and new processes. And these changes, I believe, are durable. I mean they are -- so we're going to get -- we're getting through this.

The worst is behind us. We factored in or update into the guidance, but there are some. I mean, like some issues that are outstanding like the semiconductors, but all that's factored in, and we feel good about going forward, not just FY '24, but beyond that. Regarding Ardian, look, I'll ask Sean to chime in here. But look, the -- as you look at the data, we believe it's very compelling. And you see that the sham arm in the trial increased their medication and the Ardian arm reduced. And the difference is 10 times. I mean it's a significant difference. And when you -- when physicians look at it, they understand this and are excited about it and why we're optimistic with payers is because health systems and governments are really focused on.

And payers are focused on hypertension, which -- and like the current standard, as I mentioned in the commentary, just isn't working and more data came out to substantiate that in September a physician -- to substantiate what people already know. And so now there's a new option. And I think payers are going to be compelled to take it seriously, especially with the public health epidemic that we're facing here. Sean, do you want to chime in and add some more color to this?

Sean Salmon
Executive Vice President and President of the Cardiovascular portfolio at Medtronic

Yes, you said it well, Geoff. And Josh, you're right. The totality of the data is really the strength of this program compared to just about any other new therapy I can think of, there's really not a lot of comparisons for just how much good data we have here, it's over 3,000 patients in the real world data on top of the sham-controlled randomized studies. And importantly, we did a patient preference study, which is getting more and more considered by payers because they know that patients have a say in what they want to go do.

And there's a large majority of patients that prefer having a procedure versus adding just even one more drug. And of course, we can get their blood pressure down without the addition of drugs, which is a huge benefit. I'll remind you also that Ardian was a breakthrough device had that designation. In the world of MSIT ruling that would have met automatic coverage. We don't know yet what the TSIT [Phonetic] pathway is going to look like. We'll find out more about that in the fall time frame, I suppose, or in the spring time frame, but we do think that the novelty of this therapy, the desire of patients, and of course, the public health benefit that this can provide is going to be compelling to both public and private payers around the world.

Ryan Weispfenning
Vice President & Head of Investor Relations at Medtronic

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

Brad Welnick
Senior Director, Investor Relations at Medtronic

Yes, we'll try Matt again. The next question will come from Matt O'Brien at Piper Sandler. Matt, are you there?

Matthew O'Brien
Analyst at Piper Sandler Companies

How about now?

Geoffrey Martha
Chairman & Chief Executive Officer at Medtronic

Yes, we can hear you now.

Matthew O'Brien
Analyst at Piper Sandler Companies

Thanks for taking the question. Sorry about that. I guess, just to follow-up a little bit on Josh's question, and I know how enthusiastic you still are about Ardian. But I think the ambulatory number is one that is a little bit more robust in the office-based number. So why would clinicians and payers be so interested in doing these cases or we're paying for them given the ambulatory feedback that we've seen? And are you guys still thinking about the market is $500 million by '26, $3 billion by the end of the decade?

Geoffrey Martha
Chairman & Chief Executive Officer at Medtronic

Sean, do you want to get into the specifics on the ambulatory versus the office?

Sean Salmon
Executive Vice President and President of the Cardiovascular portfolio at Medtronic

Yes. Matt, I think if you just recall how that study was done, the patients were witnessed taking their blood pressure medicine in the morning. And whether they were taking that for the full six months or not, they just took it that day, you saw the change in blood pressure that was during the daytime not what we've seen before in these prior trials. But at night time, there was still a reduction ambulatory. So I think the simple story here is that patients weren't taking their medications, except on game day and their blood pressure dropped. Now we don't know that for sure, we didn't test blood in urine every day. We just test it on game day and we know that there were more medications in the patients that were in the control arm than in the treated arm.

And as Geoff said, the changes increasing medication, decreasing medication, taking even medications for blood pressure that weren't even prescribed maybe from their medicine cabinet, maybe from their spouse or partners medicine cabinet. There's a lot of changes in medicine, which we know were present different than the prior studies. We actually have that proof now that we can measure the drug metabolites.

So cleaner, if you will, measure is that morning blood pressure, we took the office blood pressure. And that blood pressure is the one that's used for all the epidemiology studies that show what the reduction in blood pressure means for the avoidance of events and reduction of cost. And it's also the primary endpoint that's gotten just about every -- I think maybe every pharmaceutical approved for the treatment of high blood pressure.

So it is the robust standard. In fact, ambulatory is not even reimbursed in this country. So it's not used routinely in clinical practice. So it is a robust measurement that was consistently performed throughout this trial and across the other trials that we've done. So I'm confident in that part. In terms of the market size, we're very confident in this therapy. There's 1 billion people blood pressure problems around the world, even if very small amount gets you to the kind of market growth that we think is going to be meaningful for the company. So we're very confident in this therapy and that is approval and ultimate uptake.

Matthew O'Brien
Analyst at Piper Sandler Companies

Okay. That makes sense. I appreciate that. And then it's not a related follow-up, but turning over to cardiac rhythm for a second. Just -- I'd love to hear about the competitive dynamics that are going on with Micra because you've got a competitor there now? And then what the expectation is with EV-ICD, given the long-standing presence of another one of your competitors in that market. What should we be expecting between those two as we progress over the next 12 months? Thanks.

Sean Salmon
Executive Vice President and President of the Cardiovascular portfolio at Medtronic

Yes. So for Micra, we continue to grow, and you saw 18% globally, 40% of that was from international sales. And really Japan and China, in particular, really drove that great and continued success. And we'll see continued penetration in international markets and in the U.S. and a shift between single chamber to the AV device, which can pick up a larger proportion of patients, it's about 30% of the market there. And in the next 12 months, we're going to refresh both the VR and the AV devices in the coming year around the world. So while we have some competition in the United States, we fared pretty well. I think the ease of use of our micro device in the long-term data that we have as well as just the familiarity with our system has made it pretty durable.

On AURORA EV-ICD, as you know, we've got CE Mark coming up. That's a little bit of a different technique. You've got to put a lead underneath the breast bone, which takes some training to learn and we'll be very meticulous in the way we roll that out. But make no mistake that is a product that really offers a huge benefit, getting leads out of the heart, having half the size in the can and twice the battery life compared to the other device that realm and being able to voice shock by pacing people out of their fatal arrhythmia as opposed to having to have a painful shock. Those are all really, really welcome improvements, and we're excited to roll that technology out first in Europe and then the United States, next year.

Geoffrey Martha
Chairman & Chief Executive Officer at Medtronic

Chronic Rhythm business has done well and we expect it to continue to do well with products like Micra and EV ICD, but also pioneering conduction system pacing, and we've got a nice pipeline there and really a strong leadership team and strong position. So thanks for the question, Matt.

Ryan Weispfenning
Vice President & Head of Investor Relations at Medtronic

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

Brad Welnick
Senior Director, Investor Relations at Medtronic

Yes, the next question comes from Matt Taylor at Jefferies. Matt, please go ahead.

Matt Taylor
Analyst at Jefferies Financial Group

Hey guys. Thanks for taking the question. Can you hear me okay? Sorry, guys, can you hear me okay?

Geoffrey Martha
Chairman & Chief Executive Officer at Medtronic

Yes, we can, Matt.

Matt Taylor
Analyst at Jefferies Financial Group

Okay. Sorry. So I wanted to just explore you talked about the slower recovery of some of these elective and developed markets. And obviously, there's staffing, you said other challenges. I guess maybe you could just give us some insight into two things. One is, could you talk a little bit more about procedure trends through the quarter? Did you see any improvement? And then what gives you the confidence or what intelligence do you have to point to whether this is really staffing or I think investors are worried about lack of pent-up demand. Could you just address that?

Geoffrey Martha
Chairman & Chief Executive Officer at Medtronic

Sure. I'll ask Karen to comment on the procedure trends through the quarter and then we can talk to the staffing issue.

Karen Parkhill
Executive Vice President & Chief Financial Officer at Medtronic

Yes. So I would say, through the quarter, we did see, particularly in the markets that we had mentioned not as robust recovery, but some recovery. But as we ended the quarter with less robust recovery, we're just assuming that in those areas, those procedures stay where they were in the back half. We'll see if that's a good assumption or not. As we look at the first few weeks of our current quarter of the third quarter, we are seeing improvement from the second quarter. So that's pointing to some good things, but we'll see.

Geoffrey Martha
Chairman & Chief Executive Officer at Medtronic

Yes. So just to highlight what Karen is saying there. I mean, we were disappointed that we missed the call on this one for the Q2. And so now in our guidance, we've assumed a prolonged recovery here, especially for those segments that we called out, not all the segments. Like we said, many of the segments are back to pre-COVID, but there are a handful of those electives and developed markets that we've called out and Karen walked you through the assumption for the back half of the year. In terms of the staffing, I hear that dynamic in some of the cardiology space is more than others. And maybe I'll have Sean comment on that.

Sean Salmon
Executive Vice President and President of the Cardiovascular portfolio at Medtronic

Yes, I'd say a couple of things on that, Geoff. First of all, there's -- you take a therapy like TAVR, where there's multiple handoffs. You have to have pre-imaging, you have to get the patient worked up, they get their procedure done. And then there are sometimes even post imaging this done. So a lot of handoffs and the patients tend to be elderly.

So there's -- you want to sure you schedule that in a way that's okay that they can get it all done in an efficient way. We don't want them exposed to the health care environment for a long time. And I think that's challenging. It's also true that you can't wait forever. You've got -- with severe aortic stenosis, there's about an 80% mortality rate for two years from your diagnosis of that. So it's more lethal than cancer, for example, most cancers. So it's not something you can put off forever, but it is resource intensive.

And I think the other thing we're seeing with staffing just in general is, there's a prioritization for patients that you can get in and out relatively quickly so they can make downstream staffing available. So whether that's ICU recovery or you've got even transport to a better move. And I think there's some arbitrage in some countries even on the margin that they make on those procedures. Cardiac surgery have grown like a 5.5% for us. So very robust. There's a lot of margin that comes out of cardiac surgery patients. They tend not to be as deferrable as, say, like a PCI patient, for example.

So we hear it in pockets. I mentioned before, France and Germany seem to be some places that are really struggling with staffing in Europe, and we see it just in pockets around the United States and other places. So it is a dynamic situation, and we think it has gotten better, certainly a lot of places, but not everywhere yet.

Ryan Weispfenning
Vice President & Head of Investor Relations at Medtronic

Okay. Thank you, Matt. Next question, Brad.

Brad Welnick
Senior Director, Investor Relations at Medtronic

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

Pito Chickering
Analyst at Deutsche Bank Aktiengesellschaft

Hey, guys. Thanks for fitting me in here. I know that you don't have a ton of exposure here, but there has been a healthy debate around hospital demand for capital equipment this year. Can you give us any color on what you're seeing from behavior changes in hospitals for capital ordering in 2Q and what you guys assume in the back half of the year?

Geoffrey Martha
Chairman & Chief Executive Officer at Medtronic

Our capital, first of all, isn't a huge piece yet of our revenue. But it is -- it tends to be tied to profitable procedures, and we actually had a strong capital performance in last quarter. And especially in our cranial and spinal technologies business, CST, our capital there, we had a number of our -- whether it be navigation, intra-operative imaging, I had record capital quarters for us. So we're -- we definitely see a bit of -- it takes a little longer to close a deal, but the demand as you're working with the hospital and how they're going to pay or finance this, but we're having strong demand in those areas. And then, of course, we mentioned Hugo. Hugo is still new for us, but we are very happy with the placements we've been able to make on Hugo here. Of course, those are outside the U.S. but very pleased with that.

Pito Chickering
Analyst at Deutsche Bank Aktiengesellschaft

Great. Thanks so much.

Ryan Weispfenning
Vice President & Head of Investor Relations at Medtronic

Thank you, Pito. We've got time for one more question, please, Brad.

Brad Welnick
Senior Director, Investor Relations at Medtronic

Yes, our final question comes from Joanne Wuensch, Citi. Joanne, please go ahead.

Joanne Wuensch
Analyst at Smith Barney Citigroup

Hi, can you hear me?

Geoffrey Martha
Chairman & Chief Executive Officer at Medtronic

Yes, Joanne. Good morning.

Joanne Wuensch
Analyst at Smith Barney Citigroup

Wonderful. Good morning, and early happy Thanksgiving. This led straight into my Hugo question. Could you give us a little bit of an update on how you feel about the market potential for the product, the timing of U.S. approval? And at one stage, several years ago, you were talking about the potential contribution. Is there a way to start thinking about that again? Thank you.

Geoffrey Martha
Chairman & Chief Executive Officer at Medtronic

Sure. Well, thanks for the question, Joanne. Yes, like I said, we have good news on Hugo. We're kicking off the U.S. IDE with our first case is scheduled for December based on getting these instruments enhancements approved. And like I just said to Pito, we are pleased with the system placements. And in terms of the other color commentary on that, I'll ask Bob White to chime in.

Bob White
Executive Vice President and President of the Medical Surgical portfolio at Medtronic

Yes. Thanks, Geoff, and thanks, Joanne, good morning. A couple of thoughts here. First, on the overall market for Hugo, we continue to be really excited about it. Remember, there's -- around the world still 95% arousable cases are not done, that could be done robotically assistedly. So we believe this is a true market expansion opportunity. So we're still really excited about the continued term of the market and excited to be the number two player in this space.

With respect to the timing of U.S. approval, as Geoff mentioned, we expect to begin our U.S. IDE by the end of this calendar year. So that's exciting. Actual approval in the U.S., of course, depends upon the agency and the process there. So I really can't comment on that. And overall, with respect to the contribution, as you mentioned, I think it's early to call that, but given our system is now installed around the world in markets in APAC, EMEA, LATAM, we just received regulatory approvals and indication expansions in Japan, which is the third largest robotics market in the world.

We have general surgery approval in the EU, Canada and Australia, which opens up the hernia market for us. And we've started to see really strong presence and some really key congresses in Europe where live stream cases, etc. So a little early to call it contribution, Joanne, but we're starting to see the momentum in the acceleration that we talked about. So, thank you.

Geoffrey Martha
Chairman & Chief Executive Officer at Medtronic

Thanks, Joanne.

Ryan Weispfenning
Vice President & Head of Investor Relations at Medtronic

Thank you, Joanne. Geoff, please go ahead with your closing remarks.

Geoffrey Martha
Chairman & Chief Executive Officer at Medtronic

Okay. Thanks, Ryan. Well, first of all, thank you, everybody, for the questions. And we do really appreciate your support and continued interest in Medtronic. And we look forward to updating you on our progress on our Q3 earnings broadcast, which we anticipate holding on February 21.

So with that, thanks again for tuning in today. Please stay healthy and safe. I understand there's a lot of people traveling this holiday. And for those of you in the U.S., I'd like to wish you and your families a very happy Thanksgiving.

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